Question

e) Which Method do you recommend? Why Q Net Edge, Inc, is considering the purchase of new test equipment. The equipment will cost $450,000 and expected to last for 8 years and the support engineer has the following information concerning the savings salvage value estimates and project probabilities. Determine the NPW with 6%. Total 30 points P-0202 P-025 P-0.50 P-0.05 Saving per year $105,000 $65,000 $90,000 82,000 Salvage Value 75,000 40,000 65,00055,000 xplain in detail your setup, Formula, Calculation, and recommendation.

Answer 1

Present worth of investment can be calculated as below

Net Present Worth (NPW)= Present worth of benefits-Present Worth of Costs

In our case we have 4 different scenarios with different salvage value and annual savings

First of all we should calculate expected value of annual savings and salvage value

Expected Annual Savings=0.05(105000)+0.2(65000)+0.25(90000)+0.5(82000)=81750

Expected Salvage Value=0.05(75000)+0.2(40000)+0.25(65000)+0.5(55000)=55500

Present Value or Worth of Cash flow=Future Cash flow at time t/(1+r)^t for given interest rate "r"

NPW=PW of Expected benefits-PW of Costs

Expected benefits are Expected annual savings and Expected Salvage value

NPW=81750(P/A,6%,8)+55500(P/F,6%,8)-450000

(P/A,6%,8)=6.2097
(P/F,6%,8)=0.6274

NPW=81750*6.2097+55500*0.6274-450000=$92463.67

Project is always recommended if NPW>0 therefore we can have go ahead with this project/investment