Question

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.

Answer 1

	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