Question

Concord, Inc. is considering purchasing equipment costing $48000 with a 6-year useful life. The equipment will provide annual cost savings of $12000 and will be depreciated straight-line over its useful life with no salvage value. Concord requires a 10% rate of return. Present Value of an Annuity of 1 Period 8% 9% 10% 11% 12% 15% 6 4.623 4.486 4.355 4.231 4.111 3.784 What is the approximate net present value of this investment? $5832 $4260 $2771 $24000

Answer 1

Solution:

Given in question ;

Purchase Cost of Equipment = $48,000

Annual Cost Saving From = $ 12,000

Rate of Return = 10 %

PV of annuity @ 10% for 6 Years = 4.355

Calculation of Net Present Value (NPV)

Net Present Value= Present Value of Cash Inflow - Present Value of Cash Outflow

Here,

Present Value of Cash Inflow = PV of annuity * Annual Cash Saving

= 4.355 * $12,000

= $52,260

  Present Value of Cash Outflow = $ 48,000

Therefore ,

Net Present Value = $52,260 - $48,000

= $ 4,260

Therefore Net Present Value of Project = $ 4,260