Question

Weston Ltd. is considering investing in a new piece of equipment for its factory. It estimates that the machine will generate an additional $120,000 per year in revenues. The contribution margin on these incremental revenues is estimated at 40%. Incremental annual fixed costs are estimated to be $8,200. The equipment would have a salvage value of $14,000 at the end of 6 years. The company's required rate of return is 13%. What is the net present value of this investment if the equipment costs $250,000? (Ignore income taxes.) A) $2,800 B) ($51,393) C) $204,803 D) $11,768 E) ($84,173) Slide # 8

Answer 1

E.($84,173.)

first let us know the annual incremental income :

incremental contribution ($120,000*40%)	$48,000
less:fixed costs	(8,200)
incremental income	39,800

present value of income:

A*[1-(1+r)^(-n)]/r

39,800*[1-(1.13)^(-6)]/0.13

=>39,800 *3.99755

=>159,102.49..

present value of salvage = $14,000*1/(1.13)^6

=>6,724.46.

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

=>159,102.49+6,724.46-250,000

=>- $84,173