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Present value of cash inflows:

Present value of cash inflows Accounting 301 by Ersilda Cox and Latreasa Olds

Problem 6:

Problem 6 Dobson Contractors is considering buying equipment at a cost $75,000. The equipment is expected to generate cash flows of $15,000 per year for 8 years and can be sold at the end of 8 years for $5,000. Interest is a12% . Assume the equipment would be paid for on the first day of the year one, but all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.

Analyzing Data:

Analyzing Data Interest-is the amount of money paid or received in excess of the amount borrowed or lent. i=12% No Tax n- number of compounding periods. n=8 years PMT= $15,000 Salvage=$5,000

Present Value of Ordinary Annuity:

Present Value of Ordinary Annuity Ordinary Annuity It is a series of equal periodic payments. Cash inflows occur at the end of the each period. Formula

Solve for Present Value :

Solve for Present Value Annual Cash Flows: PVA= $15,000x 4.96764= $17,515 Residual Value: PV= $5000 x .40388= $2,019 Present Value of Cash inflows: $17,515+$2,019=$76,534

Table 2:

Table 2

Table 4:

Table 4

Decision:

Decision The PV of cash inflows= $76,534 PV of cash outflows =$75,000. Net Present Value of cash flows =$1,534 Dobson Contractors should purchase the machine because it will have a net present value of cash inflows of $1,534

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