A New Machine Tool Is Expected to Generate Receipts as Follows

question 19

Essay

A new machine tool is expected to generate receipts as follows: $5,000 in year one; $3,000 in year two, nothing in the next year, and $2,000 in the fourth year. At an interest rate of 6%, what is the net present value of these receipts? Is this a better net present value than $2,500 each year over four years? Explain.

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Definitions:

Contract Rate

The interest rate stated in a loan or lease agreement, dictating the rate at which interest accrues on the outstanding principal.

Bond Premium

The excess of a bond's market price over its principal amount or nominal value.

Straight-line Method

A strategy for computing depreciation or amortization through evenly apportioning the cost of an asset across its expected useful duration.

Semiannual Interest

Interest that is calculated and paid twice a year, commonly found in bonds and loans.