Question

Concord Industries is considering the purchase of new equipment costing $1,234,000 to replace existing equipment that will be sold for $189,700. The new equipment is expected to have a $215,000 salvage value at the end of its 7-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 38,000 units annually at a sales price of $25 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $92,700 in annual fixed costs.

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Calculate the present value of each cash flow assuming an 6% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amounts using a negative sign preceding the number e.g. -58,971 or parentheses e.g. (58,971).)

Cash Flow		Present Value
Purchase of new equipment
Salvage of old equipment
Sales revenue
Variable costs
Additional fixed costs
Salvage of new equipment

Answer 1

Sales revenue = Number of units sold x Selling price per unit = 38,000 x $25 = $950,000

Variable costs = Number of units sold x Variable cost per unit = 38,000 x $15 = $570,000

Now calculate the present values of the cash flows as follows:

	(A)	(B)	(A x B)
Cash Flow	Amount	Discount Factor	Present value
Purchase of new equipment	1234000	1.0000	-1234000
Salvage value of old equipment	189700	1.0000	189700
Sales revenue	950000	5.5824	5303280
Variable costs	570000	5.5824	-3181968
Additional fixed costs	92700	5.5824	-517488
Salvage of new equipment	215000	0.6651	142997