Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated...


Miles, Inc. is considering the purchase of a new machine for $600,000 that has an estimated useful life of 5 years and no salvage value. The machine will generate net annual cash flows of $105,000. It is believed that the new machine will also reduce downtime because of its reliability. Assume the discount is 8%. In order to make the project acceptable, the reduction in downtime must be worth

Year Present value of 1 at 8% Present Value of Annuity 1 at 8%
1 .926 .926
2 .857 1.783
3 .794 2.577
4 .735 3.312
5 .681 3.993

A) $45,263 per year

B) $18,264 per year

C) $49,662 per year

D) $23,958 per year

Net Present Value:

Net present value is difference between cash outflow and net present value of cash inflow. Net present value is useful to decide whether a project is beneficial or not . IF the net present value of a project is positive than project is financially visible. Project with higher present value is beneficial than other project.

Answer and Explanation:

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Cost of Capital: Flotation Cost, NPV & Internal Equity


Chapter 3 / Lesson 18

How does a business figure out the true cost and best means of obtaining capital? In this lesson, we will explore the cost of capital, flotation cost, net present value, and internal equity to help answer that question.

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