rebate at the end of first year,

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Tim Inc. is considering an initial investment of $2 million in a robotic equipment that
would improve the production process and reduce the operating cost. The robotic
equipment has an economic life of 20 years, at the end of which, the seller will buy
back the equipment for $500,000. Using cost of capital of 15% effective, Tim Inc.
estimated the NPV is -$12,500.
(a) If the seller agree to give you a rebate at the end of first year, How large would
that rebate need to be in order for you to accept this investment?
(b) If the rebate is not given, how much should the buyback price be in order for this
investment to be acceptable?
Transcribed Image Text:Tim Inc. is considering an initial investment of $2 million in a robotic equipment that would improve the production process and reduce the operating cost. The robotic equipment has an economic life of 20 years, at the end of which, the seller will buy back the equipment for $500,000. Using cost of capital of 15% effective, Tim Inc. estimated the NPV is -$12,500. (a) If the seller agree to give you a rebate at the end of first year, How large would that rebate need to be in order for you to accept this investment? (b) If the rebate is not given, how much should the buyback price be in order for this investment to be acceptable?
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