Question

Martinez Industries is considering the purchase of new equipment costing $1,247,000 to replace existing equipment that will be sold for $180,200. The new equipment is expected to have a $208,000 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 31,600 units annually at a sales price of $25 per unit. Those units will have a variable cost of $12 per unit. The company will also incur an additional $90,500 in annual fixed costs.

Calculate the present value of each cash flow assuming an 7% 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

				Year	Cash Flow	PV @ 7%	Present Value
					a	b	a*b
	Purchase of new equipment			0	-1247000	1	-1247000
	Salvage of old equipment			0	180200	1	180200
	Sales revenue		(31600*25)	1 to 7.	790000	5.3893	4257547
	Variable costs		(31600*12)	1 to 7.	-379200	5.3893	-2043623
	Additional fixed costs			1 to 7.	-90500	5.3893	-487732
	Salvage of new equipment			7	208000	0.6228	129542