Answered: Equipment A Equipment B Equipment C $…

Equipment A Equipment B Equipment C $ 1,647,351 (1,484, 100) $ 163,251 $ 1,969,888 (1,641,573) $ 328,315 Present value of net cash inflows $ 2,064,830 (1,764,812) 300,018 Initial investment NPV

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

Using capital rationing to make capital investment decisions

Hudson Manufacturing is considering three capital investment proposals. At this time, Hudson only has funds available to pursue one of the three investments.

Which investment should Hudson pursue at this time? Why?

Equipment A
Equipment B
Equipment C
$ 1,647,351
(1,484, 100)
$ 163,251
$ 1,969,888
(1,641,573)
$ 328,315
Present value of net cash inflows
$ 2,064,830
(1,764,812)
300,018
Initial investment
NPV

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