Question

# 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 \$1, Present Value Annuity of \$1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

 Net present value=Present value of annual increase in cashflow over the life of the equipment-Initial investment Initial investment cost of equipment=\$ 994000 Useful life of equipment=6 years Annual increase in cash flow=\$ 203000 Hurdle rate=7% Present value of annual increase in cashflow over the life of the equipment=Present value of \$203000 at 7% for 6 years=203000*4.7665=\$ 967600 Net present value=967600-994000=-\$26400

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