Please write out all necessary steps/formulas leading to your results. Thank you
ID: 2798981 • Letter: P
Question
Please write out all necessary steps/formulas leading to your results. Thank you!
Caroline's Candles would like to buy $134,000 of new candle-making equipment. However, the company has a major loan maturing in three years and needs this money at that time to avoid bankruptcy. The candle-making equipment is expected to increase the cash flows by $27,000 in the first year, $48,000 in the second year, and $69,000 a year for the following two years. Should Caroline's Candles buy the equipment at this time? Why or why not?
Explanation / Answer
Cumulative cash flows in year 0:-134000
Cumulative cash flows in year 1:-134000+27000=-107000
Cumulative cash flows in year 2:-107000+48000=-59000
Cumulative cash flows in year 3:-59000+69000=10000
Hence, payback or the time in which the money will be recovered is 3 years..So, there will be no problem in repaying the loan
Caroline should buy the equipment at this time; because the money will be recovered within three years