2. Rearden Metal needs to order a new blast furnace that will be delivered in one...

2. Rearden Metal needs to order a new blast furnace that will be delivered in one year. The $1,000,000 price for the blast furnace is due in one year when the new furnace is installed. The blast furnace manufacturer offers Rearden Metal a discount of $60,000 if they pay for the furnace now. If the interest rate is 7%, then the NPV of paying for the furnace now is closest to:

Solutions

Expert Solution

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

PV of future CF = $ 1000000 / 1.07

= $ 934579.44

PV of CF if paid today = $ 940000 [ $ 1000000 - $ 60000 ]

NPV = $ 934579.44 - $ 940000

= -$ 5420.56

It is not advicable topay today.

jeff jeffy answered 1 year ago

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