Question

Exercise 25-9 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 $360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Sales	$	225,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		120,000
Depreciation on new equipment		30,000
Selling and administrative expenses		22,500
Total costs and expenses		172,500
Pretax income		52,500
Income taxes (30%)		15,750
Net income	$	36,750

  
If at least an 8% return on this investment must be earned, compute the net present value of this investment.
  

Answer 1

Ans.	Present value of cash inflow = Annual cash inflows * Present value of an annuity of 1 of 12%
		$66,750 * 7.536
		$503,027
	Present value of cash inflows	$503,027
	Less: Investment	-$360,000
	Net present value	$143,027
	*Calculations for Net annual cash flow:
	Net income	$36,750
	Add: Depreciation	$30,000
	Net cash inflow	$66,750
	*Calculation of Present value factor @ 8 %.
	Year		PV @ 8%
	1	1 / (1 + 0.08)^1	0.926
	2	1 / (1 + 0.08)^2	0.857
	3	1 / (1 + 0.08)^3	0.794
	4	1 / (1 + 0.08)^4	0.735
	5	1 / (1 + 0.08)^5	0.681
	6	1 / (1 + 0.08)^6	0.630
	7	1 / (1 + 0.08)^7	0.583
	8	1 / (1 + 0.08)^8	0.540
	9	1 / (1 + 0.08)^9	0.500
	10	1 / (1 + 0.08)^10	0.463
	11	1 / (1 + 0.08)^11	0.429
	12	1 / (1 + 0.08)^12	0.397
	Total of Present value of an annuity		7.536