Question

In: Accounting

B2B Co. is considering the purchase of equipment that would allow the company to add a...

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $380,800 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 152,320 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales $ 238,000
Costs
Materials, labor, and overhead (except depreciation on new equipment) 83,000
Depreciation on new equipment 38,080
Selling and administrative expenses 23,800
Total costs and expenses 144,880
Pretax income 93,120
Income taxes (40%) 37,248
Net income $ 55,872


If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Solutions

Expert Solution

Present value of cash inflow = Annual cash inflows * Present value of an annuity (8%, 12 years)

=$93952 * 6.4177 = $602955

NPV = PV of Cash Inflows - Investment

=$602955 -$380800

= $222155

Workings

Calculation of Net Annual Cash Flow

Net Income - $55872

Depreciation - $38080

Net Cash Inflow - $93952

Calculation of PV:-

Year
1 1/(1+0.09)^1      0.9174
2 1/(1+0.09)^2      0.8417
3 1/(1+0.09)^3      0.7722
4 1/(1+0.09)^4      0.7084
5 1/(1+0.09)^5      0.6499
6 1/(1+0.09)^6      0.5963
7 1/(1+0.09)^7      0.5470
8 1/(1+0.09)^8      0.5019
9 1/(1+0.09)^9      0.4604
10 1/(1+0.09)^10      0.4224
     6.4177

ekkarill92 answered 2 years ago
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