A Local Merchant Is Considering the Purchase of a New

question 49

Essay

A local merchant is considering the purchase of a new machine which has an initial cost of $35 000.Annual operating cash inflows are expected to be $10 000 each year for five years.No salvage value is expected at the end of the machine's life.The company's cost of capital is 14 per cent.
Required: Compute the net present value of the machine.(Ignore income taxes)

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Definitions:

Net Worth

The total assets of an individual or corporation minus total liabilities, indicating financial health or stability.

YTM

Yield to Maturity; the total return anticipated on a bond if it is held until it matures, considering all interest payments and the principal repayment.

Interest Rate Risk

The potential for investment values to change due to variations in interest rates, affecting especially bonds and other fixed income investments.

Bond Prices

The amount of money required to purchase a bond, which can fluctuate based on interest rates, credit quality, and other factors.