Part A: New Equipment Rhonda is debating about buying a new ice cream machine for one of...

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Finance

Part A: New Equipment
Rhonda is debating about buying a new ice cream machine for oneof her stores. The current machine is valued at $10,000 this yearand will generate $2,500 of profit for the store. The value of themachine at the end of the year will be $8,250. Her other option isto purchase a new piece of equipment for $15,000. The new equipmentwill generate $4,000 in profit and will be valued at $12,500.Calculate the holding period return for both assets.
Rhonda also has the option of purchasing a new espresso makerthat will allow her to expand her offerings at one location. Shehas the savings to purchase the equipment, but would lose the 4.5%annual interest that the savings generates. She expects theespresso machine to generate profits of $3,000 each year over thenext 5 years. After five years she could sell the machine for$4,000. What is the present value of the machine to her?
Based on the holding period returns calculated in Part A.1which option should Rhonda choose?
If she can purchase the espresso machine in Part A.2 for$20,000, should she?
Please show your work so I can understand the formulas. Thankyou!!

Answer & Explanation Solved by verified expert

4.0 Ratings (763 Votes)

Part A1Rhonda has 2 options Lets consider option a10000 machine andoption b 15000 machineNow holding period return is basicallyWhereIncome the distributions or cash flows fromthe investment eg dividends or profitsVn the ending value of the investmentV0 the beginningvalue of the investmentso See Answer

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