Smart Bumpkins Wants to Increase Production by Adding New Equipment

question 65

Multiple Choice

Smart Bumpkins wants to increase production by adding new equipment.The cost of the upgrade is $190,000 and expected cash flows from the new upgrade are expected to be as follows over the next 6 years and the risk free rate is 5%.Should the company upgrade?
$$\begin{array} { | c | c | } \hline \text { Cash Flaws } & \text { Certainty Equivalents } \\\hline \$ 45,000 & .85 \\\hline \$ 45,000 & .80 \\\hline \$ 75,000 & .75 \\\hline \$ 110,000 & .70 \\\hline \$ 110,000 & .60 \\\hline \$ 110,000 & .50 \\\hline\end{array}$$

• A)Yes, the CNPV is $195,196.06
• B)Yes, the CNPV is $83,775.16
• C)No, the CNPV is -$75,522.84
• D)No, the CNPV is -$42,175.93

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Definitions:

Profitability

The ability of a business to earn a profit, which occurs when revenues exceed the costs and expenses involved in operating the business.

New Customers

Individuals or organizations that have recently started purchasing goods or services from a business, expanding the business's client base.

Profitability Metrics

Financial measures used to assess a company's ability to generate profit relative to its revenue, assets, or equity.

Gross Margin

A financial metric that represents the difference between revenue and the cost of goods sold, expressed as a percentage of revenue, indicating the efficiency of a company in managing its production costs.