If the interest rate is 10%, the firm should not buy the new furnace because the net present value is -$454.55.
The corporation desires to replace the building's two-year-old furnace with one that is more energy-efficient. Let's assume that the new furnace now costs $10,000.
The new furnace will save the business $5500 year on energy bills. If the interest rate is 10%, the new furnace's net present value is -$454.54, hence the business shouldn't buy it.
The difference between the interest rate a bank charges depositors and the interest rate it obtains on consumer loans is known as the net interest rate spread. The profitability of a bank is significantly impacted by the net interest rate spread. The net interest rate can be thought of as a profit margin.
Interest rate of 10%
Divided by (1+10%), net present value is equal to -10,001 plus 5,500.
= 2
NPV = - $ 454.54
Since the new equipment has a $454.54 negative net present value, the corporation shouldn't buy it.
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