Maxwell Machining is considering investing $100,000 in a new piece of machinery that will generate net annual cash flows of $50,000 each year for the next 5 years. The machine has a salvage value of $20,000 at the end of its 5 year useful life. Maxwell's cost of capital and discount rate is 10%. Which of the following tables and criteria should we use to discount the net annual cash flow?
a. PV of annuity table, n=5, i=10%
b. PV of a single sum table, n=5, i=10%
c. PV of a single sum table, n=1, i=10%
d. PV of annuity table, n=1, i=10%

An annuity is a series of payments that are fixed in value, occur after equal intervals of time and are for a finite or limited time period. To calculate the present value of an annuity, we use the annuity table for discount rates.

In the provided question, the cash flows from machine are in the form of an annuity as the amount of cash flows is fixed at $50000, they occur each year which means after equal intervals of time and they are for a finite time period as it is mentioned that the cash flows will occur for 5 years. Thus, it qualifies as an annuity and the number of discounting period is 5 years or 5. The discount rate that will be used is provided as 10%. Thus, the Present value of this annuity can be calculated as,

PV of annuity table = n = 5, i = 10%

ewomazinoade ewomazinoade · Answer 2 · 2021-12-02T13:23:08+01:00

The table and criteria to use to discount the net annual cash flow is PV of annuity table, n=5, i=10%.

An annuity is a financial product that pays the benefactor a stream of income over a period of time. The cash flows from this machine can be considered an annuity because it generates a cash flow for a period of five years. Thus, the annuity table would be used.

The appropriate discount rate to use is the cost of capital of the project. The discount rate is the minimum return of a project if it is going to profitable.

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