Question

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.)

Answer #1

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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