A Carpet Manufacturer, Whose Discount Rate Is 10%, Can Purchase

A carpet manufacturer, whose discount rate is 10%, can purchase texturizing equipment for $1,250,000 to process yarn. Incremental income before straight line depreciation from sales of texturized carpets is projected over the next five years as $95,000, $165,000, $357,000, $725,000 and $315,000, respectively. The company believes that the fashion will pass and demand in Year 6 will all but disappear. The machine can be sold at the end of Year 5 for $250,000. What should you advise the company to do?

A) Purchase the equipment as NPV is $86,952.
B) Not purchase the equipment as NPV is ($54,784) .
C) Purchase the equipment as ARR is 10.9%.
D) Not purchase the equipment as the ARR is only 9.3%.
E) Purchase the equipment as both the NPV and ARR are negative.

Correct Answer:

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