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Connor Company is considering the purchase of new equipment for $144,000. The expected life of the...

  1. Connor Company is considering the purchase of new equipment for $144,000. The expected life of the equipment is 8 years with no residual value. The equipment is expected to earn revenues of $114,000 per year. Total expenses, including depreciation, are expected to be $90,000 per year. Connor management has set a minimum acceptable rate of return of 20%. Assume straight-line depreciation.

    a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar.
    $

    Present Value of an Annuity of $1 at Compound Interest
    Year 6% 10% 12% 15% 20%
    1 0.943 0.909 0.893 0.870 0.833
    2 1.833 1.736 1.690 1.626 1.528
    3 2.673 2.487 2.402 2.283 2.106
    4 3.465 3.170 3.037 2.855 2.589
    5 4.212 3.791 3.605 3.352 2.991
    6 4.917 4.355 4.111 3.784 3.326
    7 5.582 4.868 4.564 4.160 3.605
    8 6.210 5.335 4.968 4.487 3.837
    9 6.802 5.759 5.328 4.772 4.031
    10 7.360 6.145 5.650 5.019 4.192

    b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.

    Annual net cash flow $
    Present value of equipment cash flows $
    Less equipment costs $
    Net present value of equipment $

    c. Does your analysis support the purchase of the new equipment?

Solutions

Expert Solution

a .equal annual net cash flows from operating the equipment

Revenues 114000 (Given)
Less Expenses including Depreciation 90000 (Given)
Net Profit 24000
ADD Depreciation 18000 =144000/8 depreciation is a non cash expense so added back
Equal Annual Cash flows 42000

b. net present value of the new equipment

Annual Cash flows = 42000

Present value @ 20% =3.837 (taken from table @ 20% in 8 year.)

Present value of cash flows = 42000 x 3.837

                                         = 161154

Annual net cash flow 42000
Present value of equipment cash flows 161154
Less equipment costs 144000
Net present value of equipment 17154

c.Yes the new equipment can be purchased because Net present value of equipment is positive.

ekkarill92 answered 1 hour ago
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