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In: Accounting

Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost...

Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $420,000, with an estimated salvage value of $30,000. Lakeside’s cost of capital is 10%. Table 6-4 and Table 6-5. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.)

Required:
Calculate the net present value of the new production equipment.

Solutions

Expert Solution

Calculation of Net Present Value of new production equipment is shown as follows:-

Net Present value of new production equipment will be equal to sum of present value of annual cost savings and present value of salvage value minus cost of new production equipment.

Cost of new production equipment = $420,000

Salvage Value of New equipment at the end of five years = $30,000

Relevant present value factor (PVF) for discounting of salvage value = PVF(10%,5 yrs)

= 0.6209

Present Value (PV) of Salvage Value = Salvage Value*Relevant PVF

= $30,000*0.6209 = $18,627

Production Cost Savings per month = $10,000

Annual Production cost savings = $10,000*12 months per year = $120,000

Relevant Present Value Annuity Factor (PVAF) for discounting of annual cost savings = PVAF(10%, 5 yrs)

= 3.7908

Present Value of Annual cost savings = Annual Cost Savings*PVAF(10%, 5 yrs)

= $120,000*3.7908 = $454,896

Net Present Value = (PV of Salvage Value+PV of Annual Cost Savings) - Cost of New Equipment

= $18,627 + $454,886 - $420,000 = $53,523

Therefore the net present value of the new production equipment is $53,523.

ekkarill92 answered 2 years ago
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