A company is considering expanding their production capabilities with a new machine that costs
and has a projected lifespan of 10 years. They estimate the increased production will provide a constant
per year of additional income. Money can earn 1.18 per year, compounded continuously. Should the
company buy the machine?
Select an answer
the machine

To determine if the company should buy the machine, we can calculate the net present value (NPV) of the projected income against the cost of the machine. Given the continuous compounding at 1.18%, you can use the formula for the present value of an annuity. The present value of receiving annually for 10 years at this interest rate calculates to approximately . Subtracting the initial cost of the machine gives an NPV of about . Since the NPV is negative, it indicates that the machine is not a good investment.

In decision-making, it’s crucial to review all assumptions and projections. One common mistake is to underestimate operational costs or overestimate income from the new machine. It’s essential to conduct a sensitivity analysis to assess how changes in key variables, such as interest rates and production income, might impact the overall decision. This can give you a clearer picture and ensure that the investment aligns with the company’s financial goals.