Capital budget, NPV
3. Dean Thomas runs a copy shop. Recent growth in the business means that an additional photocopying machine is needed. Dean has learned that he can rent a machine for $8,000/year plus 0.3 cents for each copy made. The rental payments are due each year on the last day of the year. Or, Dean can buy a copy machine for $40,000, to be paid on the first day of the first year. Dean will pay the same for electricity, toner, insurance, and maintenance costs on the copier whether he rents or buys it. The copier will last for 4 years and will be obsolete with a negligible salvage value at the end of that time. If Dean buys the machine, straight line depreciation will be used in preparing the copy shop’s financial statements.
Dean expects the copier will be used to make 1,500,000 copies per year. For purposes of this question, suppose the interest rate is 10%. Ignore taxes and inflation. In the first year, the net cash inflow to Dean’s business
A.is greater if he rents the copier.
B.is greater if he buys the copier.
C.is the same whether he buys or rents the copier.
D.Cannot be determined from the information given.
12.Atlantic Company is considering investing in specialized equipment costing $360,000. The equipment has a useful life of 5 years and a residual value of $45,000. Depreciation is calculated using the straight- line method. The expected net cash inflows from the investment are:
Year 1 $160,000
Year 2 130,000
Year 3 100,000
Year 4 55,000
Year 5 40,000
Atlantic Company’s required rate of return is 14%.
Note: Present value tables are needed.
Is the internal rate of return of the investment equal to, higher than, or lower than 14%?
A.Cannot be determined from the given data
C.Equal to 14%