Answer:
At the rate of return of 18%, the purchase of the new machine is not convenient.
Explanation:
Giving the following information:
Simone Company is considering the purchase of a new machine costing $50,000. It is expected to save $9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned.
We need to find the net present value using the following formula:
NPV= -Io + ∑[Cf/(1+i)^n]
Cf= cash flow
NPV= -50,000 + 9,000/1.18 + 9,000/1.18^2 + 9,000/1.18^3 + ... + 9,000/1.18^10
NPV= -9,553
At the rate of return of 18%, the purchase of the new machine is not convenient. It will produce a loss in value.
