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

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Costs
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