Question

2. Good Sleep Inc. is considering the purchase of a new mattress assembler that allows the construction of multiple firmness levels in the same mattress. Good Sleep anticipates the following 5-year earnings stream from the sale of this mattresS. Years in the Future Anticipated Profit (000's) 24 26 28 30 4 If the discount rate is 10% and the machine costs $90 (000), payable at once, what is the net present value of the machine? Is it a good purchase? (Write out the net earnings stream to generate your answer) Net Present Value Good purchase?:

Answer 1

2.

R = 10%

Initial investment = $90 (,000)

Present value of benefits = 22/1.1 + 24/1.1^2 + 26/1.1^3 + 28/1.1^4 + 30/1.1^5

Present value of benefits = $97.12 (,000)

So,

Net present value = 97.12 - 90 = $7.12 (,000)

Good Purchase = Yes

It is a good purchase, because net present value is positive.

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