Grant Inc Would Like to Replace an Outdated Piece of Equipment

question 32

Multiple Choice

Grant Inc. would like to replace an outdated piece of equipment with a newer model. Grant has determined that the new equipment needs to generate annual cash inflows of $10,000 for six years and have a salvage value at the end of year six of $4,000. Grant uses a cost of capital equal to 15 percent when making capital investment decisions. Given this information, which of the following statements is true regarding the cost of the new equipment if, using net present value analysis, Grant decides to purchase the new equipment because it has a positive net present value?

• A) The cost of the equipment was $64,000 or less.
• B) The cost of the equipment was $73,600 or less.
• C) The cost of the equipment was $39,574 or less.
• D) The cost of the equipment was $52,983 or less.

---

Definitions:

Portfolio Diversification

A strategy for managing risk that involves diversifying a portfolio with a broad range of investments to reduce the effect of the performance of any individual asset.

Security

A financial instrument that represents ownership (stocks), a creditor relationship (bonds), or rights to ownership (options) that can be bought and sold.

Expected Return

The weighted average of the probable returns of an investment, considering all possible outcomes and their likelihoods.

Standard Deviation

A statistical index that measures how much data values deviate from each other within a dataset.