Question
In: Finance
B2B Co. is considering the purchase of equipment that would allow the company to add a...
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $379,200 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 151,680 units of the equipment’s product each year. The expected annual income related to this equipment follows.
| Sales | $ | 237,000 | |
| Costs | |||
| Materials, labor, and overhead (except depreciation on new equipment) | 83,000 | ||
| Depreciation on new equipment | 37,920 | ||
| Selling and administrative expenses | 23,700 | ||
| Total costs and expenses | 144,620 | ||
| Pretax income | 92,380 | ||
| Income taxes (40%) | 36,952 | ||
| Net income | $ | 55,428 |
If at least an 9% return on this investment must be earned,
compute the net present value of this investment. (PV of $1, FV of
$1, PVA of $1, and FVA of $1) (Use appropriate factor(s)
from the tables provided.)
|
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Solutions
Expert Solution
| Chart values are based on | |||
| n = 10 Years | |||
| I = 9% | |||
| Select Chart | Amount | PV Factor = | Present Value |
| Initial Investment | (379,200.00) | 1.00 | (379,200.00) |
| PVCO | (379,200.00) | ||
| 1-10 | 93,348.00 | 6.4177 | 599,075.51 |
| Present Value of cash inflows | 599,075.51 | ||
| Net Present Value | 219,875.51 | ||
| Net Income | 55,428.00 | ||
| Depreciation on new equipment | 37,920.00 | ||
| Cash flows | 93,348.00 | ||
| Time | PVF at 9% | ||
| 1.00 | 0.9174 | ||
| 2.00 | 0.8417 | ||
| 3.00 | 0.7722 | ||
| 4.00 | 0.7084 | ||
| 5.00 | 0.6499 | ||
| 6.00 | 0.5963 | ||
| 7.00 | 0.5470 | ||
| 8.00 | 0.5019 | ||
| 9.00 | 0.4604 | ||
| 10.00 | 0.4224 | ||
| PVF for 10 Years | 6.4177 | ||
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