Question

Monty Industries is considering the purchase of new equipment costing $1,300,000 to replace existing equipment that will be sold for $194,000. The new equipment is expected to have a $223,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 32,600 units annually at a sales price of $27 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $70,000 in annual fixed costs.

Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Cash Flow		Timing		Amount
Purchase of new equipment		Select a period of time Year 0 Year 1 Year 2 Year 3 Year 4 Years 1-4		$Enter a dollar amount Enter a dollar amount
Salvage of old equipment		Select a period of time Year 0 Year 1 Year 2 Year 3 Year 4 Years 1-4		Enter a dollar amountEnter a dollar amount
Sales revenue		Select a period of time Year 0 Year 1 Year 2 Year 3 Year 4 Years 1-4		Enter a dollar amountEnter a dollar amount
Variable costs		Select a period of time Year 0 Year 1 Year 2 Year 3 Year 4 Years 1-4		Enter a dollar amountEnter a dollar amount
Additional fixed costs		Select a period of time Year 0 Year 1 Year 2 Year 3 Year 4 Years 1-4		Enter a dollar amountEnter a dollar amount
Salvage of new equipment		Select a period of time Years 1-4 Year 3 Year 1 Year 2 Year 0 Year 4		Enter a dollar amountEnter a dollar amount

Answer 1

Based on the information available in the question, we can answer the questions as follows:-

Cash Flow	Timing	Amount	Rationale
Purchase of New equipment	Year 0	(1,300,000)	One time expense incurred at the time of purchase of equipment
Salvage of Old equipment	Year 0	194,000	This is realized at the time of the upgrade of old equipment to new equipment
Sales Revenue	Years 1 - 4	880,200	This is a yearly revenue to the company on account of upgrading to new equipment
Variable costs	Years 1 - 4	(489,000)	This is the yearly variable costs associated with production using the new equipment
Additional Fixed costs	Years 1 - 4	(70,000)	This is the fixed costs associated with using the new equipment
Salvage of new equipment	Year 4	223,000	This is the salvage value that would be realized after 4 years at the end of its useful life