(Present Value of Annuity Table Required)Velocity Tire Company's Managerial Accountant

question 59

Essay

(Present value of annuity table required)Velocity Tire Company's managerial accountant assesses the net present value of two different types of tread repair machines in order to ascertain the better investment option.The Retreadit-2000 will require an investment of $320,000 while the Econ-4760 will require an investment of $280,000.Each piece of equipment has a useful life of 10 years with no residual value.The Retreadit-2000 annual net cash inflow has a static value of $72,000 annually whereas the Econ-4760 has a static cash inflow predicted at $49,500.The revenue generated by the chosen product will be invested in an annuity at 12%,compute the net present value of the two pieces of equipment and state which will be the better investment according to their respective NPVs.

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Definitions:

Future Value

The value of an asset or cash at a specific future date, based on its expected growth over time.

Compounded Monthly

Interest calculation method where the accrued interest is added to the principal sum each month, leading to interest on interest.

Interest Charge

A fee charged by a lender to a borrower for the use of borrowed money, often expressed as an annual percentage of the principal.

Inherited Money

Wealth or assets received from someone after their death.