Question

In: Finance

Replacing old equipment at an immediate cost of $125,000 and an additional outlay of $25,000 three...

Replacing old equipment at an immediate cost of $125,000 and an additional outlay of $25,000 three years from now will result in savings of ​$32,000 per year for 7 years. The required rate of return is 13​% compounded annually. Compute the net present value and determine if the investment should be accepted or rejected according to the net present value criterion.

The net present value of the project is​ $__.

​(Round the final answer to the nearest dollar as needed. Round all intermediate values to six decimal places as​ needed.)

Solutions

Expert Solution

The Net Present Value ​(NPV​) of the Project

Year

Annual cash flows ($)

Present Value Factor (PVF) at 13.00%

Present Value of annual cash flows ($)

[Annual cash flow x PVF]

1

32,000

0.884956

28,319

2

32,000

0.783147

25,061

3

7,000

[32,000 – 25,000]

0.693050

4,851

4

32,000

0.613319

19,626

5

32,000

0.542760

17,368

6

32,000

0.480319

15,370

7

32,000

0.425061

13,602

TOTAL

1,24,197

Net Present Value (NPV) = Present Value of annual cash inflows – Initial Investment

= $124,197 - $125,000

= -$803 (Negative NPV)

“Hence, the Net Present Value (NPV) of the Project will be -$803 (Negative NPV)”

DECISION

The investment should be rejected, since the NPV for the Project is -$803 (Negative NPV)

NOTE    

The Formula for calculating the Present Value Factor is [1/(1 + r)n], Where “r” is the Discount/Interest Rate and “n” is the number of years.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Replacing old equipment at an immediate cost of ​$80,000 and an additional outlay of $15,000 four...
Replacing old equipment at an immediate cost of ​$80,000 and an additional outlay of $15,000 four years from now will result in savings of $22,000 per year for 6 years. The required rate of return is 12​% compounded annually. Compute the net present value and determine if the investment should be accepted or rejected according to the net present value criterion.
A proposed project requires an initial cash outlay of $250,919 for equipment and an additional cash...
A proposed project requires an initial cash outlay of $250,919 for equipment and an additional cash outlay of $30,951 in year 1 to cover operating costs. During years 2 through 4, the project will generate cash inflows of $500,000 a year. What is the net present value of this project at a discount rate of 4 percent? Round your answer to the nearest whole dollar.
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $51800...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $51800 seven years ago. The old equipment currently has no market value. The new equipment cost $63100. The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $37500. The new equipment is expected to save the firm $29000 annually by increasing...
Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost...
Q4) Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $66,263.00 seven years ago. The old equipment currently has no market value. The new equipment cost $59,022.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $33,912.00 . The new equipment is expected to save the firm $22,506.00...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $61,372.00...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $61,372.00 seven years ago. The old equipment currently has no market value. The new equipment cost $84,355.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $12,497.00 . The new equipment is expected to save the firm $30,152.00 annually...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $60,304.00...
Your corporation is considering replacing older equipment. The old machine is fully depreciated and cost $60,304.00 seven years ago. The old equipment currently has no market value. The new equipment cost $74,133.00 . The new equipment will be depreciated to zero using straight-line depreciation for the four-year life of the project. At the end of the project the equipment is expected to have a salvage value of $13,952.00 . The new equipment is expected to save the firm $15,285.00 annually...
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment....
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below: Old Equipment New Equipment Current book value $1,500,000 Current market value $2,500,000 Acquisition cost $6,200,000 Remaining life 10 years Life 10 years Annual sales $350,000 Annual sales $850,000 Cash operating expenses $140,000 Cash operating expenses $500,000 Annual depreciation $150,000 Annual depreciation $620,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value after 10 years $240,000 Expected...
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment....
TA, Inc. is considering replacing a piece of old equipment with a piece of new equipment. Details for both are given below: Old Equipment New Equipment Current book value $1,800,000 Current market value $2,500,000 Acquisition cost $6,200,000 Remaining life 10 years Life 10 years Annual sales $350,000 Annual sales $850,000 Cash operating expenses $140,000 Cash operating expenses $500,000 Annual depreciation $180,000 Annual depreciation $620,000 Accounting salvage value $0 Accounting salvage value $0 Expected salvage value $240,000 Expected salvage value $750,000...
Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost...
Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $420,000, with an estimated salvage value of $30,000. Lakeside’s cost of capital is 10%. Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required: Calculate the net present value of the new production equipment.
Lakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost...
Lakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $450,000, with an estimated salvage value of $40,000. Lakeside’s cost of capital is 8%. Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required: Calculate the net present value of the new production equipment.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT