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
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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