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Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $51,500,...

Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $51,500, and will have a salvage value of $5,040 after six years. Using the new piece of equipment will increase Grady’s annual cash flows by $6,190. Grady has a hurdle rate of 12%. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.)


a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.)




b. What is the present value of the salvage value? (Round your answer to 2 decimal places.)



c. What is the net present value of the equipment purchase? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.)



d. Based on financial factors, should Grady purchase the equipment?

  • Yes

  • No

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Homework Answers

Answer #1
a) Present value of increase annual cash inflow = Present Value Annuity of $1. at 12% for six years * annual increase cash flow
=$6190*0.50663
=$25449.61or 25449.62 or 25449.63
b) Present value of salvage value = Present Value of $1 for 12% 6th year * salvage value
=0.50663*5040
=$2553.42 or  
=$2553.42
c) Net Present value = Present value of cash inflow + present value of salvage value - initial investment
=$25449.61+2553.42-51500
=$28003.03-51500
=$23496.97 or 23496.96 or 23496.95
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