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Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine may...

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Accounting

  1. Difend Cleaners has been considering the purchase of anindustrial dry-cleaning machine. The existing machine may be soldfor $100,000. The new machine will cost $350,000 and an additionalcash investment in working capital of $100,000 will be required.The investment is expected to net $110,000 in additional cashinflows during the first year of acquisition and $250,000 eachadditional year of use. The new machine has a three-year life, andzero disposal value. Income taxes are not considered in thisproblem. The working capital investment will not be recovered atthe end of the asset's life.

    What is the net present value of the investment, assuming therequired rate of return is 20%? Would thecompany want to purchase the new machine?

A) $(62,600); yes

B) $(59,880); no

C) $59,880; yes

D) $62,600; no

  1. Referring to the same facts for Difend Cleaners, what is thenet present value of the investment, assuming the required rate ofreturn is 10%? Would the company want to purchase the newmachine?

A) $144,240 ; yes

B) $180,000 ; yes

C) $(180,000); no

D) $(144,240); no

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