Tim Inc. is considering an initial investment of $2 million in a robotic equipment thatwould improve the production process and reduce the operating cost. The roboticequipment has an economic life of 20 years, at the end of which, the seller will buyback 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 wouldthat 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 thisinvestment to be acceptable?

Net Present Value or NPV is the amount that exceeds the Present Value of Cash outflow. Cost of…

Answered: rebate at the end of first year,

Business

Finance

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

Problem 1PS

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Question

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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