Question

However, she wants to know which type of page Web Resources should advertise and market. Although custom pages have a higher contribution margin per service, each custom page requires 15 design hours, whereas basic pages require only 2 design hours per page. On which page type should the company focus? Explain your answer

Answer 1

Step 1

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Step 2

To calculate the present value of annual cash flow of $57,000 at 14% rate of return for 6 years,
we need the present value of annuity of $1 at 14% rate of interest discounted for 6 years.

The present value of annuity of $1 discounted at 14% interest for 6 years = 3.889.

Calculate the present value of annuity of $57,000 at 14% interest discounted for 6 years as follows:

Present Value = Annual cash inflow value ×Annuity value= $57,000×3.889=$221,673">Present Value === Annual cash inflow value ×Annuity value $57,000×3.889$221,673Present Value = Annual cash inflow value ×Annuity value= $57,000×3.889=$221,673

Calculate the net present value of the machine.

Present value of the annual cash flow = $221,673

Present value of the cash outflow(cost of the machine) = $ 218,500

hence, net present value =Present value of cash inflow-Present value of cash outflow=$221,673-$218,500=$3,173">hence, net present value ===(Present value of cash inflow−Present value of cash outflow)$221,673−$218,500$3,173hence, net present value =Present value of cash inflow-Present value of cash outflow=$221,673-$218,500=$3,173

 

Since the present value of the cash inflow is greater than the present value of cash outflow by $3,173, the company should purchase the machine.