Question

Saved Exercise 11-9 Computing net present value LO P3 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 $371,200 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 148.480 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net Income $ 232,000 81,000 37, 120 23,200 141 320 90,689 27.204 63,476 If at least an 9% return on this investment must be earned, compute the net present value of this investment (PV of $1. FV or $1. PVA of S1 and EVA ES) (Use appropriate factor(s) from the tables provided) $ Chart Values are Based on: Select Chart Present Value of an Annuity of 1 Amount 100,596 x Py Factor - 3 Present Value Present value of cash flows Present value of cash outflows Net present value

Answer 1

Annual net cash inflow = annual net income + annual depreciation

= $63476 + $37120 = $100596

Therefore,

Net present value = present value of annual net cash inflows - present value of cash outflows

= ($100596 x 6.41766) - $371200

= $645590.93 - $371200

= $274390.93

therefore, net present value is 274390.93 which is positive.

Where,

PVAF(9%, 10) = 6.41766