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# Simone company is considering the purchase of a new machine costing \$50,000. it is expected to save \$9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. management will not make any investment unless at least an 18% rate of return can be earned. using the net present value method, determine if the proposal is acceptable. assume all tax effects are included in these numbers.

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At the rate of return of 18%, the purchase of the new machine is not convenient.

Explanation:

Giving the following information:

Simone Company is considering the purchase of a new machine costing \$50,000. It is expected to save \$9,000 cash per year for 10 years, has an estimated useful life of 10 years, and no salvage value. Management will not make any investment unless at least an 18% rate of return can be earned.

We need to find the net present value using the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

NPV= -50,000 + 9,000/1.18 + 9,000/1.18^2 + 9,000/1.18^3 + ... + 9,000/1.18^10

NPV= -9,553

At the rate of return of 18%, the purchase of the new machine is not convenient. It will produce a loss in value.

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