Question

Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $54,000. The equipment will have an initial cost of $622,000 and have an 8 year life. The salvage value of the equipment is estimated to be $94,000. If the hurdle rate is 11%, what is the approximate net present value? (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. Round your final answer to the nearest dollar amount.)

$94,000

Less than zero

$528,000

$36,319

Answer 1

Cost = 622,000

Salvage value = 94,000

Useful life = 8 years

Depreciation under Straight line method = (cost - salvage value) / useful life

= (622,000 - 94,000) / 8

= 66,000

Annual increase in net income after tax = 54,000

Annual increase in cash flows = 54,000 + 66,000 = 120,000

Salvage value in year 8 = 94,000

PVAF of 11% for 8 years = 5.146

PVAF of 11% in year 8 = 0.434

Present value of cash inflows = (120,000 * 5.146) + (94,000 * 0.434)

= 617,520 + 40,796

= 658,316

Present value of cash outflows = 622,000

Net present value = Present value of cash inflows - Present value of cash outflows

= 658,316 - 622,000

= 36,316

The answer is 36,319 (the decimal difference is due to rounding off)