In: Accounting
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.
Calculation of Annual Cash Inflows | |||||||||
Particulars | Details | Amount | |||||||
Annual Production Cost savings | =$10000*12 | $ 1,20,000.00 | |||||||
TOTAL ANNUAL CASH INFLOWS | $ 1,20,000.00 | ||||||||
CALCULATION OF NPV | |||||||||
Year | Amount | Discount Factors@8% | Present Value | ||||||
0 | $ -4,50,000.00 | 1.000 | $ -4,50,000.00 | ||||||
1 | $ 1,20,000.00 | 0.926 | $ 1,11,111.11 | ||||||
2 | $ 1,20,000.00 | 0.857 | $ 1,02,880.66 | ||||||
3 | $ 1,20,000.00 | 0.794 | $ 95,259.87 | ||||||
4 | $ 1,20,000.00 | 0.735 | $ 88,203.58 | ||||||
5 | $ 1,20,000.00 | 0.681 | $ 81,669.98 | ||||||
5 | $ 40,000.00 | 0.681 | $ 27,223.33 | ||||||
NPV | $ 56,349 |