Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine may...

Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine may be sold for $100,000. The new machine will cost $350,000 and an additional cash investment in working capital of $100,000 will be required. The investment is expected to net $110,000 in additional cash inflows during the first year of acquisition and $250,000 each additional year of use. The new machine has a three-year life, and zero disposal value. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life.

What is the net present value of the investment, assuming the required rate of return is 20%? Would the company want to purchase the new machine?

A) $(62,600); yes

B) $(59,880); no

C) $59,880; yes

D) $62,600; no

Referring to the same facts for Difend Cleaners, what is the net present value of the investment, assuming the required rate of return is 10%? Would the company want to purchase the new machine?

A) $144,240 ; yes

B) $180,000 ; yes

C) $(180,000); no

D) $(144,240); no

Expert Solution

ekkarill92 answered 8 months ago

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