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A firm is considering purchasing equipment that will reduce costs by ₱40,000. The equipment costs ₱300,000...

A firm is considering purchasing equipment that will reduce costs by ₱40,000. The equipment costs ₱300,000 and has a salvage value of ₱50,000 and a life of 7 years. The annual maintenance cost is ₱6,000. While not in use by the firm, the equipment can be rented to others to generate an income of ₱10,000 per year. If money can be invested for an 8% return, is the firm justified in buying the equipment?

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Answer #1
Year 0 1 2 3 4 5 6 7
1.Cost of the equipment -300000
2.Reduction in annual costs 40000 40000 40000 40000 40000 40000 40000
3. Annual Maintenance costs -6000 -6000 -6000 -6000 -6000 -6000 -6000
4. Annual rental income lost, if in use -10000 -10000 -10000 -10000 -10000 -10000 -10000
5.Salvage at end yr. 7 50000
6.Total annual cashflows(sum 1 to 5) -300000 24000 24000 24000 24000 24000 24000 74000
7.PV F at 8%(1/1.08^yr.n) 1 0.92593 0.85734 0.79383 0.73503 0.68058 0.63017 0.58349
8.PV at 8%(6*7) -300000 22222.22 20576.13 19051.97 17640.72 16334 15124.07 43178.29
NPV at 8%(Sum of row 8) -145873
Answer:
NO. Not justified in buying
as the NPV of its predicted cashflows is NEGATIVE at the required rate of return of 8%
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