Question

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 $377,600 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 151,040 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales	$	236,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		83,000
Depreciation on new equipment		62,933
Selling and administrative expenses		23,600
Total costs and expenses		169,533
Pretax income		66,467
Income taxes (40%)		26,587
Net income	$	39,880

If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Answer 1

Annual net income = $39,880

Annual depreciation expense = $62,933

Annual cash inflow = Annual net income + Annual depreciation expense

= 39,880+62,933

= $102,813

Present value of cash inflows = Annual cash inflow x Present value of annuity factor (i%,n)

= 102,813 x Present value of annuity factor (9%,6)

= 102,813 x 4.48592

= 461,211

Initial investment = $377,600

Net present value = Present value of cash inflows - Initial investment

= 461,211-377,600

= $83,611