The United Way is considering purchasing a new machine with a cost of $9,000, no salvage value, and a useful life of five years. The machine is expected to generate $2,850 in cash inflows during each year of the machine’s five-year life. Assuming the United Way’s hurdle rate is 14 percent, what is the maximum price the United Way should pay for this machine? Why?
Compute the net present value of the machine. Should the United Way acquire the machine? Why?
Gerard, a not-for-profit entity, is considering the acquisition of a baseball winder that costs $56,200. The baseball winder has an expected life of 10 years and is expected to reduce production costs by $9,000 a year. Gerard’s hurdle rate is 12 percent.
What is the net present value of this project? Should Gerard undertake this investment? Why?