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 agoRelated Solutions
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