Blossoms Inc., a local florist, is considering replacing its current refrigerato

Question

Blossoms Inc., a local florist, is considering replacing its current refrigerator used for storing flowers with a larger one. The estimated cost of the new refrigerator will be $30,000. Using a discount rate of 15%, the company calculates a net present value for the new refrigerator of $6,000. Based on this information, which of the following statements is true?

a. If the actual cost of the new refrigerator ends up being $30,000, the actual rate of return is equal to 15%. b. If the actual cost of the new refrigerator ends up being greater than $36,000, the net present value will become negative. c. If the actual cost of the new refrigerator ends up being less than $30,000, the company should not make the investment. d. If the actual cost of the new refrigerator ends up being less than $36,000, the net present value will become negative.

Explanation / Answer

ANSWER :

b. If the actual cost of the new refrigerator ends up being greater than $36,000, the net present value will become negative

This is so because:-

let present value of cash flows be x

NPV = present value of cash flows - Initial Investment'

6000 = x - 30000

x = 36000

Now if, price of refrigerator goes up say to 37000, npv will become negative

b. If the actual cost of the new refrigerator ends up being greater than $36,000, the net present value will become negative

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