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 1 year ago

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