Answer to Question #273833 in Accounting for enny

Question

(Ignore income taxes in this problem.) Allen Company's required rate of return is 14%. The company is considering the purchase of a new machine that will save $10,000 per year in cash operating costs. The machine will cost $40,000 and will have an 8-year useful life with zero salvage value. Straight-line depreciation will be used.

Explain at least 3 points the meaning of cost of capital and its relevance in a net present value (NPV) analysis.

Answer 1

The cost of capital represents the minimum desired rate of return whereas The net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to deduce the profitability of an investment or project.