Question

Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from...

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

Homework Answers

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)


Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from...
Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $203,000. The equipment will have an initial cost of $994,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 7%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of...
Major Corp. is considering the purchase of a new piece of equipment. The cost savings from...
Major Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $114,000. The equipment will have an initial cost of $577,000 and have an 8 year life. The equipment has no salvage value. The hurdle rate is 8%. Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from...
Grove Corp. is considering the purchase of a new piece of equipment. The cost savings from...
Grove 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 of $200,900. The equipment will have an initial cost of $1,200,900 and have an 8 year life. The salvage value of the equipment is estimated to be $200,900. The hurdle rate is 10%. Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of...
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...
Dobson Corp. is considering the purchase of a new piece of equipment. The cost savings from...
Dobson 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 of $57,000. The equipment will have an initial cost of $502,000 and have an seven year life. There is no salvage value of the equipment. The hurdle rate is 11%. Ignore income taxes. a. Calculate accounting rate of return. (Round your answer to 2 decimal places.) b. Calculate payback period. (Round your answer...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment...
ben is considering the purchase of new piece of equipment. the cost savings from the equipment would result in an annual increase in net income of $200000. the equipment will have an initial cost of $1200000 and have an 8 year life. the salvage value of the equipment is estimated to be $200000. the hurdle rate is 10%. what is accounting rate of return? b) what is the payback period? c) what is the net present value? d) what would...
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has...
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:   A B Initial Investment 320,000 454,000 Annual Cash...
A company is considering the purchase of a piece of equipment that would cost $400,000 and...
A company is considering the purchase of a piece of equipment that would cost $400,000 and would last for 9 years. At the end of 9 years, the equipment would have a salvage value of $93,000. The equipment would provide annual cost savings of $73,000. The company requires a minimum pretax return of 17% on all investment projects. (Ignore income taxes.) Required: Provide your Excel input and the final net present value amount you calculated. (If a variable is not...
XYZ Company is considering the purchase of a new piece of equipment and has gathered the...
XYZ Company is considering the purchase of a new piece of equipment and has gathered the following information about the purchase: Initial investment ................ ? Annual cost savings ............... $20,000 Salvage value in 6 years .......... 30% of original cost of the equipment Repair in 4 years ................. $21,000 Cost of capital ................... 10% Life of project ................... 6 years The net present value of this investment was calculated to be $22,924. Calculate the salvage value for this piece of...
B2B Co. is considering the purchase of equipment that would allow the company to add a...
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $376,000 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 150,400 units of the equipment’s product each year. The expected annual income related to this equipment follows: Sales: $ 235,000 Costs Materials, labor, and overhead (except depreciation on new equipment): 82,000...