A fast-food establishment is thinking of buying a new cooking grill and refrigeration unit.

Question

The costs of these new machines are $12,500 and $9,000, respectively. The installation costs
of the new equipment will run about $800. It is estimated that 10% more customers can be
served with the new equipment, which would mean an additional annual net cash flow of
approximately $4,500. The salvage value of the old grill and refrigeration unit is estimated
to be $1,000.
The firm’s cost of capital is 12%. The equipment should last 10 years, at a minimum.
Required:
Using the net present value method, should the company purchase the new equipment?
(Ignore income tax effects.)

Answer 1

is four eigths greater than four tenths