the cost of a firm’s internal common equity is generally higher than the costs of a firm’s external common equity due to issuance costs. (True or False)
Answers
True. The cost of a firm's internal common equity is generally higher than the cost of a firm's external common equity due to the issuance costs associated with internal equity, such as the costs of stock option plans, stock purchase plans, and other incentives.
External equity, on the other hand, involves fewer issuance costs since it is generally acquired through public offerings or private placements. The statement is generally true. The cost of a firm's internal common equity, which is the return required by the firm's shareholders on the equity they have invested in the company, is generally higher than the cost of external common equity, which is the return required by new investors in the company's stock. This is because the cost of internal common equity includes not only the cost of the equity capital itself, but also the opportunity cost of retaining earnings rather than distributing them as dividends to shareholders. Additionally, internal common equity may be subject to higher taxes than external equity, further increasing the cost of internal equity financing. On the other hand, external common equity may be subject to issuance costs such as underwriting fees, legal and accounting expenses, and listing fees. However, the magnitude of these costs may vary depending on the size and type of the company and the nature of the external financing used.
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Related Questions
SMA Corporation’s controller, Nina Low, is concerned that net income may be lower this year. She is concerned that upper-level management might recommend cost reductions by laying off accounting staff, including herself. Nina knows that depreciation is a major expense for SMA. The company currently uses the same method for financial reporting as it uses for tax purposes, that is a declining balance method. Nina is considering changing to the straight-line method. Nina does not want to draw attention to the increase in net income that would result from switching depreciation methods. She thinks, "Why don’t I just increase the estimated useful lives and the residual values of the property, plant and equipment? They are only estimates anyway. These changes will decrease depreciation expense and increase income. I may be able to save my job and those of my staff." Nina calls her professional accounting body’s "Ethics Hotline" and reaches the Ethical Accountant for advice. Instructions As the Ethical Accountant providing advice to Nina, identify the objectives of depreciation, who the stake holders are in this situation, what disclosures are required, whether any ethical issues are involved, and recommend a course of action Nina should follow.
Refer to The importance of Depreciation; Depreciation – Methods & Allocation, Qualitative Characteristics of Useful Information & Financial Reporting Issues, Usefulness of the Statement of Cash Flows to provide your answer
1. Objectives: what is the objectives?
2. Analysis: identify stakeholders; identify ethical issues; rational / validity of changing depreciation methods; ASPE / IFRS disclosure requirements for accounting changes.
3. Recommendation: your recommendation should include impact of depreciation on cash flow.
Answers
SMA Corporation’s controller, Nina Low, is concerned that net income may be lower this year. She is concerned that upper-level management might recommend cost reductions by laying off accounting staff, including herself.
1. Objectives of Depreciation:
The objectives of depreciation are to allocate the cost of an asset over its useful life, match expenses with revenues, and accurately reflect the consumption of the asset's economic benefits.
It is used to determine the periodic expense associated with the use of assets and to properly value the assets on the balance sheet.
2. Analysis:
a. Stakeholders:
Nina Low (Controller)
Upper-level management
Accounting staff
Shareholders/Investors
Regulatory bodies (e.g., SEC, CRA)
Auditors
Financial statement users
b. Ethical Issues:
The ethical issues involved include:
The financial statements by intentionally manipulating depreciation estimates to artificially increase net income.
Conflict of interest for Nina Low, as she is making these changes to potentially save her job and those of her staff.
c. Rationality/Validity of changing depreciation methods:
Changing depreciation methods solely for the purpose of increasing net income and potentially saving jobs is not a valid or rational reason.
Depreciation methods should be chosen based on their alignment with the nature of the assets, the industry standards, and the most accurate reflection of the asset's consumption over its useful life.
d. ASPE/IFRS Disclosure Requirements for Accounting Changes:
Both ASPE (Accounting Standards for Private Enterprises) and IFRS (International Financial Reporting Standards) require disclosure of accounting policy changes.
Any changes in accounting estimates, including changes in estimated useful lives and residual values of property and equipment.
3. Recommendation:
Avoid manipulating depreciation estimates solely to increase net income.
Disclose any changes in accounting estimates and policies in accordance with the applicable accounting standards (ASPE or IFRS).
Provide a clear and transparent explanation for the changes, including the rationale and impact on financial results.
Consider alternative cost-saving measures that do not involve unethical practices, such as exploring other areas for cost reduction or process improvement.
Focus on providing accurate and reliable financial information that serves the best interests of stakeholders and maintains the integrity of the financial reporting process.
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What type of function does a project management tool have that a task management tool does not?
file sharing
progress tracking
commenting
budgeting
Answers
The commenting are type of function does a project management tool have that a task management tool does not. Thus, option (c) is correct.
What is management?
The term “management” refers to the act of managing. The management of the business activities. Management is the basis of art, science, and the profession.
The management are the division of the different departments are the created such as project management and the task management. The file sharing, progress tracking, and budgeting. But, the commenting is not the function of the task management tool.
As a result, the commenting is not the function does a project management tool have that a task management tool does not. Therefore, option (c) is correct.
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The last time to trade an equity option that is about to expire is:
a. 2:00 PM central time; 3:00 PM eastern time; on the 3rd Friday of the expiration month
b. 3:00 PM central time; 4:00 PM eastern time; on the 3rd Friday of the expiration month
c. 4:00 PM central time; 5:00 PM eastern time on the 3rd Friday of the expiration month
d. 5:00 PM central time; 6:00 PM eastern time on the 3rd Friday of the expiration month
Answers
Answer:
b. 3:00 PM central time; 4:00 PM eastern time; on the 3rd Friday of the expiration month
Explanation:
The last time to TRADE AN EQUITY OPTION THAT IS ABOUT TO EXPIRE IS: 3:00 PM CENTRAL TIME, 4:00 PM EASTERN TIME and on the 3rd FRIDAY OF THE EXPIRATION MONTH reason been that any EQUITY OPTION contract that exceed the EXPIRE DATE will be INVALID which is why it is of Paramount to TRADE AN EQUITY OPTIONS before the expiration date in order for the TRADED EQUITY OPTIONS to be VALID.
Therefore last time to trade an equity option that is about to expire is:
3:00 PM central time
4:00 PM eastern time
3rd Friday of the expiration month.
Technician A says that an air chisel is used to dress welds.
Technician B says that paintless dent repair (PDR) tools can be used to remove small dents.
Who is right?
O A only
O Bonly
O Both A and B
Neither Anor B
Answers
Answer:
B
Explanation:
Technician B is right a pdr can be used to remove dents
According to statement, technician b only is correct. Technician B says that paintless dent repair (PDR) tools can be used to remove small dents. Thus, option (b) is correct.
What is Technician?
The term technician is details of a subject or occupation, a computer technician.
Technician is work of repair and expert of work. It is easily handle problem and resolve solution.
As a result, option (b) is correct.
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the five mission areas outlined in the national response framework are prevention, protection, mitigation, response, and ____________?
Answers
Answer:
recovery
Explanation:
There is one framework for each of the five mission areas wich are Prevention,protection, mitigation,response, and Recovery
Hope this helped you!
The five mission areas outlined in the national response framework are prevention, protection, mitigation, response, and recovery.
What is mission?
The term “mission” refers to deciding the aim or goal. The person's mission is a task and duty are performed by the person at a particular time period. The mission is to direct the performance as achieved step by step. The mission, as stated by the achievers, is growth.
According to the National Preparedness System (NPS), the integrated approach to achieving the mission is the first step of prevention; the second step is protection; the third step is mitigation; the fourth step is response; and the last step is recovery. The recovery is to recover from the crisis.
Hence, the significance of the mission is aforementioned.
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Mary is a stay-at-home mother whose husband died. She has two small
children to care for, and her husband was the primary wage earner for their
family. What Social Security benefits would care for Mary and her children?
A) retirement benefits
B) disability benefits
C) survivor’s benefits
D) worker’s compensation
Answers
Answer:
The answer that I think would be correct is option C (survivors benefits)
Explanation:
Retirement benefits definition: a form of social insurance payment made by the US Social Security (for age 62 and older) considering that Mary has two small kids, she probably isn't that old.
Disability benefits: in order to be eligible, you have to be unable to do regular or customary work for at least right days. Considering the fact that Mary is a stay at home mother then she wouldn't be employed.
Survivors benefit: this allows a retiree to ensure after death, a continuous lifetime annuity for their dependents.
Workers compensation: provision of benefits to employees who suffered work related injuries. Mary's husband most likely didn't die in the work place.
your car insurance will not protect you if you break the law.
true or false
Answers
Answer: No.
Explanation: Your car insurance is for car purposes only. They can not help you if you break the law. Unless it is car related
Answer:
True
Explanation:
Because I'm right, get over it
What does an exchange rate tell you?
Answers
Answer:
An exchange rate tells you how much one type of currency is worth in a different currency.
Explanation:
Answer:A foreign exchange rate is the relative value between two currencies. Simply put, "exchange rates are the amount of one currency you can exchange for another."
Explanation:
an antidilution provision ensures that the selling of stock at a later date will decrease the economic value of the venture capitalist's investment.
Answers
No, an antidilution provision actually protects the venture capitalist's investment from being decreased in economic value.
An antidilution provision is a clause included in investment agreements to safeguard the interests of early investors, such as venture capitalists when a company issues new stock at a lower price than what they initially paid. It adjusts the conversion price or provides additional shares to maintain the economic value of the venture capitalist's investment, ensuring they do not suffer any dilution in their ownership stake or value.
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the export-import bank provides financing aid to prospective u.s. exporters.a. trueb. false
Answers
The answer is true. The Export-Import Bank provides financing aid to prospective U.S. exporters, helping them to compete in the global market and grow their businesses.
Detailed answer: The Export-Import Bank of the United States (EXIM) provides financing aid to prospective U.S. exporters in the form of loans, loan guarantees, and export credit insurance. This aid is intended to support American businesses in exporting their products and services overseas and to help them compete with foreign companies that receive similar financing from their own governments. Therefore, the statement that the Export-Import Bank provides financing aid to prospective U.S. exporters is true.
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hen auditing the revenue and collection cycle, auditors normally select balances to confirm from the
a. Sales journal.
b. Accounts receivable listing.
c. General ledger.
d. Cash receipts listing.
Answers
When reviewing revenue and collection cycles, reviewers typically select balances to review from the accounts receivable list.
A receivable list is a compilation of all receivables for which a company sells goods or services on receivables. When a business sells for consideration, the customer receives the goods or services immediately, but can pay later. This list is also called the accounts receivable ledger. The total amount of all accounts receivable is recorded as a current asset on the balance sheet and includes invoices for items or work performed on credit to customers.
Accounts receivable are recorded as debit items on the assets portion of the balance sheet. It is short-term as it is usually a short-term asset and usually he is realized within a year. It refers to books used to keep financial records and other related accounts. So when you look at your accounts receivable ledger, you'll see that each customer's balance is regularly adjusted as more transactions are made.
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which of the accounts below are considered accrued expenses? multiple choice question. cash, building, equipment owner, capital, owner,withdrawal wages expense, interest expense unearned revenue, utility expense
Answers
Wages expense and interest expense are considered accrued expenses.
What are accrued expenses?Accrued expenses, also known as accrued liabilities, is an accounting term that refers to expenses recorded in the books before they are paid. Expenses are recognized in the accounting period in which they are incurred. Examples of deferred income are personnel costs and interest expenses.They relate to unpaid and unrecognized costs incurred during a period. They appear on the income statement. The provision is shown on the company's balance sheet. It should be seen at the end of the company's accounting period. Adjustments are made based on journal entries entered in the company's general ledger. Accrued expenses or liabilities are incurred when expenses are incurred before cash is paid. Payments are typically made within one year of the transaction date, so the expenditure is almost always recorded as a current liability on the company's balance sheet.To learn more about accrued expenses from the given link :
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Which of the following is NOT a repayment plan option? What is the answer
Answers
The following is NOT a repayment plan is Loan forgiveness repayment plan.
The Extended Repayment Plan: This is a repayment plan option whereby the loan can be paid back for a period of about 25 years.
The Income-Sensitive Repayment Plan: This is a repayment plan option for those who want low income. Here, payment can either increase or reduce based on what the person earns annually.
The Graduated Repayment Plan: This is a repayment plan option which increases every two years.
The loan forgiveness repayment plan is not a repayment plan option.
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The following question may be like this:
Which of the following is NOT a repayment plan option?
O Extended repayment plan
O Loan forgiveness repayment plan
O Income sensitive repayment plan
O Graduated repayment plan
How to find users you wanna add
Answers
tbh there's no search thing to find users
Hope this helped you- have a good day bro cya)
PLEASE HELP WITH THIS
Answers
Supplies Expense 2,900,Supplies 2,900This entry records the supplies used during the year. The Supplies Expense account is debited for the amount of supplies used.
What is year ?Year is a measurement of time that is commonly defined as the number of full rotations of the earth around the sun. A year is typically divided into twelve months, each of which consists of thirty to thirty-one days. Depending on the calendar system, a year can also include an extra day or two to account for the fraction of a rotation that is leftover. In most cases, a year is 365 days long, although leap years are 366 days long. The length of a year determines how we mark the passage of time and when events are celebrated.
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what is an essential approach in optimizing the layout of your brochure?
Answers
This can be achieved by using a clear and simple design, choosing a legible font, and incorporating ample white space to create a clean and organized look.
It is also important to prioritize the most important information and use headings, subheadings, and bullet points to break up text and make it easier to digest. Additionally, including high-quality images and graphics can add interest and help to convey your message. Overall, the goal is to create a brochure that is both informative and visually appealing, so that it effectively communicates your message to your audience. You should also use visual elements such as images and graphics to break up text and make the brochure more engaging.
However, it's important not to overload the brochure with too much visual content or cluttered layouts, as this can overwhelm the reader and make it difficult to find important information.
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at what point should you be ready to sell a stock? when it triggers your stop orders if it is not underperforming, but it is not performing its original role in your portfolio when other stocks in the same sector are seriously out-performing it all of the above
Answers
Point when you should be ready to sell a stock is all of the above options.
A stop order is one amongst the 2 main order sorts you may encounter within the market: stop and limit. The key for the purchase order is that it's perpetually dead within the direction that the value is moving. as an example, if the market is moving lower, the purchase order are to sell at a pre-set worth below the present market value
Out-performing stock means the corporate can turn out a far better rate of come back than similar corporations, however the stock might not be the simplest entertainer within the index. An analyst's performance is evaluated supported however stocks really perform once a rating is assigned.
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Rectify the following errors identified in the books of Shyam. The Trial Balance
showed ₹ 875 as an excess debit.
a. The total of debit side of Expenses account been cast in excess of ₹575.
b. Paid electricity bill of the proprietor’s residence was debited to
Electricity expenses ₹1,050.
c. An amount of ₹ 150 entered in sales return book has been posted to the
debit of Verma, who returned the goods.
Pass journal entries for correcting the above transactions and prepare
Suspense Account.
PLEASE ANSWERRR
Answers
Answer:
Part 1
a
Debit : Suspense Account ₹575
Credit : Expenses ₹575
Reducing the Debit of the Expenses Account by ₹575
b
Debit : Drawings ₹1,050
Credit : Electricity expenses ₹1,050
Drawings treated as Electricity expenses now corrected
c
Debit : Suspense Account ₹ 300
Credit : Account Receivable - Verma ₹ 300
Sales returns posted on wrong side of Verna`s Account now corrected
Part 2
Suspense Account
Debit :
Difference on Trial Balance ₹ 875
Expenses ₹575
Account Receivable - Verma ₹ 300
Totals ₹ 1,750
Credit :
Profit and Loss ₹ 1,750
Totals ₹ 1,750
Explanation:
Only errors that affect trial balance totals to not agree will require correction through suspense account.
That said, the errors that do not affect trial balance totals such as Error of Principle, Error of Original Entry do not require to be corrected through the Suspense Account.
The difference in the Suspense Account usually cost more effort to continue to check the records than it is worth it for the firm, hence it is written off to profit and loss account
Why do lenders require collateral for a secured loan? (10 points)
A) It reduces risk to the lender
B)It eliminates interest charges
C) It reduces the cost of the financed good
D) It protects consumers from loss
Answers
Answer:
A) It reduces risk to the lender
Explanation:
Collateral refers to a valuable asset that a borrower offers to the lender to secure a loan. Typically, the collateral will have a higher market value than the loan amount. Asset mostly used as collateral include homes, properties, and motor vehicles. The lender will keep custody of the title documents until the borrower repays full amount borrowed.
Offering collateral for a loan indicates the borrower's willingness to repay the loan. The lender is assured of recovering their money. If the borrower defaults, the lender will dispose of the collateral to recover their money. This reduces the lender's risk.
Answer:
A) it reduces risk to the lender
Explanation:
I just took the quiz and got it right.
Why is it important that an auditor should have CA (SA) qualification
Answers
Auditors must have extensive accounting knowledge and practical experience. A Chartered Accountant (CA) is a professional who has completed the required academic qualifications, experience, and practical training to qualify as an auditor and become a member of their country's Institute of Chartered Accountants (ICA).
It is critical that an auditor has a CA (SA) qualification for the following reasons:1. The standard of a CA (SA) qualification is known to be very high, and it requires significant time, dedication, and effort to complete. A candidate must complete a four-year degree, complete practical training, pass several board examinations, and complete a certain number of hours of practical work experience to obtain the CA (SA) qualification.2. The CA (SA) qualification has a strong reputation for professionalism, and its members must adhere to strict ethical standards.
As a result, the qualification is well-respected in the accounting and auditing professions, both nationally and internationally.3. The South African Institute of Chartered Accountants (SAICA) provides auditors who have the CA (SA) qualification with continuous professional development, updates on regulatory changes, and other valuable information. This means that auditors are kept up-to-date on new developments and the latest trends in the industry.4. The CA (SA) qualification provides auditors with a thorough understanding of accounting principles and financial reporting requirements.
This knowledge is critical when it comes to auditing financial statements because it allows the auditor to identify any discrepancies or irregularities.5. In South Africa, the Companies Act requires that audits of financial statements must be conducted by a registered auditor who has the CA (SA) qualification. The purpose of this is to ensure that only qualified and competent auditors are responsible for the audit of financial statements.
The CA (SA) qualification is highly regarded, and it provides auditors with extensive knowledge, practical experience, and ethical standards. As a result, it is critical that an auditor has this qualification.
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The effective operation of a firm and its supply chain is NOT as important as the design and implementation of its processes. A. True B. False
Answers
A company's supply chain and overall efficiency are NOT as crucial as the planning and execution of its business operations. It is true.
A supply chain is a group of people and businesses who work together to create products and distribute them to customers. The chain's links start with the companies that generate the raw ingredients and terminate when the van delivers the final item to the customer.
An optimized supply chain reduces costs and improves the effectiveness of the manufacturing cycle, making supply chain management an essential procedure. In order to cut costs and maintain their competitiveness, businesses work to strengthen their supply chains. A company's supply chain and overall efficiency are NOT as crucial as the planning and execution of its business operations.
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HURRY!!! #15
What percent of U.S. jobs are currently generated by the service industry?
90 percent
60 percent
70 percent
80 percent
Answers
What are 4 benefits of big data?
Answers
Volume, Velocity, Variety, and Veracity are the four characteristics that most people use to define "big" data—they are also known as the four Vs.
Which data do you mean?Data is information that has undergone a transformation to make it transferable or processable in a computing environment. Data are pieces of information that have been altered into a pdf format for usage with contemporary computing devices and communication channels. You can choose to use the singular or plural form of the topic of data.
Why is data important?In order to keep going forward, organizations can use solid data to define baselines, benchmarks, and targets. Data allows measurement, so you may create baselines, identify benchmarks, and establish performance goals. The condition of a space before a particular remedy was applied is known as the baseline.
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1. Buyers, sellers, and producers all have someone else they are competing with for economic benefits. This is known as:
O competition
O monopoly
O collusid
O cartels
Answers
Answer:monopoly
Explanation:
The Graves Corporation was incorporated in 2018 and incurred a net op-erating loss of $35,000. The company’s operating income in 2019 was $47,000. Because of a downturn in the local economy, the company suffers a net operating loss of $21,000 in 2020. What is the treatment of the 2020 loss? How would your answer change if Graves were an S corporation?
Answers
Answer:
The 2018 loss was carried forward and decreased the corporation's tax liability during 2019. The 2020 loss should also be carried forward to offset any future gains and reduce future tax liabilities. A company can carry forward a loss indefinitely, since it is allowed to deduct a maximum of 80% of a future year's net income.
If this was an S corporation, it would be pass through entity that is not taxed directly, instead, the owners are taxed. Therefore, this $21,000 loss will be distributed proportionally among all the stockholders, and they must deduct their taxes independently.
what rapidly changing factor has led to the social age in business?
Answers
Answer:
Communication technology
Explanation:
if you have many competing financial goals, what should you do to help yourself focus on the most important ones
a. get more unearned income
b. prioritize and make a budget
c. open a checking account
d. diversify your investments
Answers
Answer:
b. prioritize and make a budget.
Explanation:
Comprehending the drive and purpose behind one's objectives will help broaden their mind and allow people to think about why they set the targets initially. Financial priorities are perfect because they're helping people establish an ambitious plan for their life to move ahead. To balance competing financial objectives, one needs to think about which goals are already in place, which ones may be pending for a few years, and what adjustments one might like to add to their budget.
Answer:
b. prioritize and make a budget
Explanation:
Calculate value of the following bond 15-year bond, with $1000 principal, a coupon rate 7.5%
and discount rate 5.5%
2. Calculate the pricing of a $1000 T-Bill with 10 days to maturity and yielding 3.5%
3. Calculate the pricing of a $1000 T-Bill with 38 days to maturity and yielding 6.5%
Answers
1. The value of the 15-year bond can be calculated using the present value formula, which is the sum of discounted future cash flows. Given a $1000 principal, a coupon rate of 7.5%, and a discount rate of 5.5%, the bond's value can be determined.
2. The pricing of a $1000 T-Bill with 10 days to maturity and yielding 3.5% can be calculated by discounting the face value of the T-Bill using the given yield and time to maturity.
3. The pricing of a $1000 T-Bill with 38 days to maturity and yielding 6.5% can also be determined by discounting the face value of the T-Bill based on the given yield and time to maturity.
1. To calculate the value of the 15-year bond, we need to calculate the present value of the bond's future cash flows. This includes annual coupon payments of $1000 x 7.5% = $75 for 15 years and the principal amount of $1000 at the end of the 15-year period. Using the discount rate of 5.5%, we can discount each cash flow back to its present value and sum them up to get the bond's value.
2. For the T-Bill with 10 days to maturity and yielding 3.5%, we can determine the pricing by discounting the face value of $1000 using the yield and the time to maturity. We can calculate the discount factor as 1 / (1 + yield/365)^(number of days to maturity), and multiply it by the face value to obtain the pricing.
3. Similarly, for the T-Bill with 38 days to maturity and yielding 6.5%, we can calculate the pricing by discounting the face value of $1000 using the given yield and time to maturity. Applying the same discount factor formula, we can determine the present value of the T-Bill.
By performing the necessary calculations, we can obtain the precise pricing for both the T-Bills based on their respective yields and time to maturity.
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If there is a conflict between a person’s verbal communication and non-verbal communication, people are more likely to believe their non-verbal communication. please select the best answer from the choices provided t f
Answers
If there is a conflict between a person's verbal and non-verbal communication, people are more likely to believe their non-verbal communication - TRUE
While verbal communication is essential to achieving success in both interpersonal and professional relationships, non-verbal communication – also known as body language – always speaks louder than words. Often performed automatically rather than intentionally, body language is the use of observable behaviors, attitudes, and habits for nonverbal communication.
When you communicate with other people, you are constantly sending and receiving non-verbal signals, whether you realize it or not. Your posture, tone of voice, amount of eye contact, gestures, and other nonverbal behaviors all convey important messages. They can put people at ease, inspire confidence and draw people to you, or they can irritate and confuse.
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MKM Intemational is seeking to purchase a new CNC machine in order to reduce costs. Two alternative machines are in consideration. Machine 1 costs $600,000, but yields a 15 percent savings over the current machine used. Machine 2 costs $850,000, but yields a 25 percent savings over the current machine used. In order to meet demand, the following forecasted cost information for the current machine is also provided. a. Based on the NPV of the cash flows for these 5 yoars, which machine should MKM intemational purchase? Assume a discount fate of 12 percent Assuming a discount rate of 12 percent, MKM international should purchase (Enter your responses rounded to the nearest whole number.)
Answers
MKM International should purchase Machine 1 because it has a lower cost and still yields a 15 percent savings compared to the current machine.
To determine which machine MKM International should purchase based on the NPV of cash flows, we need to calculate the net present value (NPV) for both machines. The NPV is calculated by discounting the cash flows using the given discount rate of 12 percent. To calculate the NPV for each machine, we need to consider the cost of the machine and the savings it yields. For Machine 1, the cost is $600,000 and it yields a 15 percent savings over the current machine. The savings can be calculated by multiplying the cost of the current machine by the savings percentage (15 percent). The savings per year is then subtracted from the cost of the machine. To calculate the NPV, we discount the cash flows for each year using the discount rate of 12 percent. The NPV for Machine 1 is the sum of the discounted cash flows.
For Machine 2, the cost is $850,000 and it yields a 25 percent savings over the current machine. We follow the same steps to calculate the savings per year, subtract it from the cost, and discount the cash flows using the discount rate of 12 percent. The NPV for Machine 2 is the sum of the discounted cash flows.
Comparing the NPVs of both machines, we find that Machine 1 has a lower cost and still yields a 15 percent savings. Therefore, based on the NPV of the cash flows over the 5 years, MKM International should purchase Machine 1.
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