Grant Inc Would Like to Replace an Outdated Piece of Equipment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Grant Inc. would like to replace an outdated piece of equipment with a newer model.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.

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Definitions:

Notes Receivable

Financial assets representing amounts owed to a company by entities or individuals, typically evidenced by a written promissory note.