Question
In: Finance
Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from...
Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $50,000. The equipment will have an initial cost of $626,000 and have an 8 year life. The salvage value of the equipment is estimated to be $114,000. If the hurdle rate is 11%, what is the approximate net present value?
can you please explain everything step by step as to how you get the answer including the present value factor.
Solutions
Expert Solution
Annual Depreciation =[cost-salvage value ]/useful life
=[626000-114000]/8
= 512000/8
= 64000
Annual cash flow =Net income +depreciation
= 50000+64000
= 114000
Present value of cash flow =[PVA11%,8*Annual cash flow ]+[PVF11%,8*Salvage value]
=[5.14312*114000]+[.43393*114000]
= 586315.68+ 49468.02
= $ 635783.70
NPV =Present value of cash flow -Initial cost
= 635783.70-626000
= 9783.70
**Find present value factor using the formula 1/(1+i)^n or using financial calculator where i=11%,n=8 ,FV=1
**Find present value annuity factor using the formula [1/(1+i)^1+1/(1+i)^2+ 1/(1+i)^3+........1/(1+i)8] or using financial calculator where i = 11% n= 8 ,PMT = 1
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