1.Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2018 a customer asked Beloit to quote a price for a custom-designed doughnut machine to be delivered by the end of 2018. Once it is purchased, the customer intends to place the machine in service in January 2019 and will use it four years. The expected annual operating cash flow is estimated to be $140,000. The expected salvage value of the equipment at the end of five years is about 12% of the initial purchase price. To expect an 18% required rate of return on investment, what is the maximum amount that should be spent on purchasing the doughnut machine? Ans. P= $397,456.48
1.Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2018 a customer asked Beloit to quote a price for a custom-designed doughnut machine to be delivered by the end of 2018. Once it is purchased, the customer intends to place the machine in service in January 2019 and will use it four years. The expected annual operating cash flow is estimated to be $140,000. The expected salvage value of the equipment at the end of five years is about 12% of the initial purchase price. To expect an 18% required rate of return on investment, what is the maximum amount that should be spent on purchasing the doughnut machine? Ans. P= $397,456.48
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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I want you to show and explain the explanation below. The answer is correct but i can't understand how it come up with the right answer. Attached pic below is the problem
The annual estimated cash flow is $140,000.
The salvage value will be 12% of the initial price after 5 years.
The discount rate (r) is 18%
Let us assume the initial price of the doughnut machine be X.
PV of
The maximum purchase price of the doughnut machine is $397,456.48.
Transcribed Image Text:1.Beloit Co. is a manufacturer of mini-doughnut machine makers. Early in 2018 a customer asked Beloit to quote a price
for a custom-designed doughnut machine to be delivered by the end of 2018. Once it is purchased, the customer intends
to place the machine in service in January 2019 and will use it four years. The expected annual operating cash flow is
estimated to be $140,000. The expected salvage value of the equipment at the end of five years is about 12% of the
initial purchase price. To expect an 18% required rate of return on investment, what is the maximum amount that
should be spent on purchasing the doughnut machine? Ans. P= $397,456.48
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