Question

The Woodruff Corporation purchased a piece of equipment three years ago for $245,000. It has an asset depreciation range (ADR) midpoint of eight years. The old equipment can be sold for $88,750.

A new piece of equipment can be purchased for $340,500. It also has an ADR of eight years.

Assume the old and new equipment would provide the following operating gains (or losses) over the next six years:

Year New Equipment Old Equipment 1............... $79,750 $26,500 2............... 76,000 17,750 3............... 71,250 10,250 4............... 61,500 6,250 5............... 48,750 7,250 6............... 43,000 -6,500

The firm has a 36 percent tax rate and a 9 percent cost of capital.

The cost of new equipment is 257498.40.

What is the present value of incremental benefits? (I need help on finding the correct percentages b/c I'm coming up with wrong answer when multiplying by 9% for present value)

Answer 1

The BCR (Benefit cost ratio) is calculated by dividing the proposed total cash benefits of a project by the proposed total cash costs of the project. Prior to dividing the numbers, the net present value of the respective cash flows over the proposed lifetime of the project – taking into account the terminal values, including salvage/remediation costs – are calculated.

f a project has a BCR that is greater than 1, the project will deliver a positive net present value (NPV) and will have an internal rate of return (IRR) above the discount rate used in the DCF calculations. This suggests that the NPV of the project’s cash flows outweighs the NPV of the costs, and the project should be considered.

Calculation as below: