As an example

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

This preview shows page 1. Sign up to view the full content.

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
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

## 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.

Ask a homework question - tutors are online