The Management of Hence Corporation Is Considering the Purchase of a New

question 11

Multiple Choice

The management of Hence Corporation is considering the purchase of a new machine costing $200,000. The company's desired rate of return is 10%. The present value factors for $1 at compound interest of 10% for 1 through 5 years are 0.909, 0.826, 0.751, 0.683, and 0.621, respectively. In addition to the foregoing information, use the following data in determining the acceptability in this situation: $\begin{array}{|l|l|l|}\hline\text { Net } & \text { Income from } \\\text { Cash }\\ \hline\text { Flow }& \text {Operations }&\text { Year }\\\hline \$ 90,000 & \$ 50,000 & 1 \\\hline 60,000 & 20,000 & 2 \\\hline 50,000 & 10,000 & 3 \\\hline 45,000 & 5,000 & 4 \\\hline 45,000 & 5,000 & 5 \\\hline\end{array}$
The present value index for this investment is:

• A) 0.88.
• B) 1.45.
• C) 1.14.
• D) 0.70.

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Definitions:

Substitution Effect

The change in quantity demanded as consumers switch to or from alternatives when the price changes.

Labor-Leisure Framework

A model in economics that illustrates the trade-off between labor, supplying work for income, and leisure, the time spent not working.

Equilibrium Wage

The wage rate at which the supply of labor matches the demand for labor, leading to an equilibrium in the labor market.

Competitive Labor Market

A market where numerous buyers (employers) and sellers (workers) exist, leading to wages derived from supply and demand conditions.