Question
In: Accounting
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would...
Burnaby Ltd. is considering the acquisition of new production equipment. If purchased, the new equipment would cost $1,850,000. Installation and testing costs would be $35,000 and $25,000 respectively. Once operational, the equipment will cause an increase in working capital of $120,000. The new equipment is expected to generate increased annual sales of $720,000. Variable costs to operate the machine are estimated at 42% of sales and annual fixed costs would be lowered by $75,000. The equipmenthasanestimate6yearlifeandasalvagevalueof$90,000. Thecompanyrequiresan11% return on its investments. Ignore income taxes. Required:
a. Compute the net present value.
b. How do you compare NPV to Payback method? Which method is likely to be more reliable?
Solutions
ekkarill92 answered 10 months agoRelated Solutions
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10 FTEs. The equipment purchase price is $4,500,000 plus 10%
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potential for additional volume of 150,000 units in the first year,
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On 1 July 2018, ABC Ltd purchased and recorded equipment at its cost of acquisition of...
On 1 July 2018, ABC Ltd purchased and recorded equipment at its
cost of acquisition of $320 000. The equipment is expected to have
a useful life for seven years and an estimated residual value of
$10 000. ABC Ltd depreciates the asset using the straight-line
method. ABC Ltd uses the revaluation model to equipment and records
accumulated depreciation using the net method. The reporting period
end of ABC Ltd is 30 June. ABC Ltd revalued the equipment on 30...
On 1 July 2018, ABC Ltd purchased and recorded equipment at its cost of acquisition of...
On 1 July 2018, ABC Ltd purchased and recorded equipment at its
cost of acquisition of $320 000. The equipment is expected to have
a useful life for seven years and an estimated residual value of
$10 000. ABC Ltd depreciates the asset using the straight-line
method. ABC Ltd uses the revaluation model to equipment and records
accumulated depreciation using the net method. The reporting period
end of ABC Ltd is 30 June. ABC Ltd revalued the equipment on 30...
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require $10,000 in spare parts thus increasing the firm’s net
working capital by that amount. The system falls into the MACRS
3-year class (depreciation rates of 33%, 45%, 15%, and 7%). The
current machine it would replace could be sold for $50,000 and
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*If you...
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production area. The equipment has an initial cost of $ 3,000 with
operation and maintenance costs, as well as the market liquidation
value as shown in the following table:
Year
Costs of operation
Rescue value
1
$1,000
$1,500
2
$1,700
$1,000
3
$2,400
$500
4
$3,100
$0
Determine the Optimal Economic Life of this investment, if the
MARR of the company is 12%
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