As an example

As an example - from purchasing the jukebox The firm's...

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As an example, consider a restaurant that is trying to decide whether to invest in a new piece of  capital equipment—a jukebox. The jukebox costs $7,000 and lasts 4 years. The restaurant estimates  that the jukebox will provide it with income of $2,000 per year, net of maintenance costs. After 4  years, the scrap value of the jukebox is estimated at $500. In determining whether to purchase the  jukebox, the firm will calculate the net present value of the present and future income that it receives 
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Unformatted text preview: from purchasing the jukebox. The firm's present value calculations are shown in Table 1 for an interest rate of 10%. TABLE 1 Present Value of Jukebox at an Interest Rate of 10% Year Outlay (−) or income Present value calculation Present value of outlay (−) or income −$7,000 — −$7,000 1 2,000 $2,0000/(1.10) 1 1,818 2 2,000 2,000/(1.10) 2 1,653 3 2,000 2,000/(1.10) 3 1,503 4 2,500 2,500/(1.10) 4 1,708 Total net present value: −$318...
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This note was uploaded on 11/19/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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