Question

Barney Googal owns a garage and is contemplating purchasing a tire retreading machine for $19,820. After estimating costs and revenues, Barney projects a net cash inflow from the retreading machine of $3,600 annually for 8 years. Barney hopes to earn a return of 8% on such investments. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

What is the present value of the retreading operation? (Round answer to 2 decimal places, e.g. 25.25.) Present value $

Should Barney Googal purchase the retreading machine? Barney Googal.....Should/Should........ not purchase the retreading machine.

Answer 1

Year	Annual Cash Flow	PV Factor at 8% Discount rate	Discounted Cash Flow
1	$        3,600.00	0.92593	$      3,333.35
2	$        3,600.00	0.85734	$      3,086.42
3	$        3,600.00	0.79383	$      2,857.79
4	$        3,600.00	0.73503	$      2,646.11
5	$        3,600.00	0.68058	$      2,450.09
6	$        3,600.00	0.63017	$      2,268.61
7	$        3,600.00	0.58349	$      2,100.56
8	$        3,600.00	0.54027	$      1,944.97
Present value of Cash Inflows			$    20,687.90
Less: Initial Investment			$   19,820.00
Net Present value			$          867.90

Present value of cash =$20687.90 and Net present value =$867.90

Barney Googal.....Should purchase the retreading machine.

Googal should purchase machine because net present value is positive.