Question

Connor Company is considering the purchase of new equipment for $125,000. The expected life of the equipment is 5 years with no residual value. The equipment is expected to earn revenues of $155,000 per year. Total expenses, including depreciation, are expected to be $125,000 per year. Connor management has set a minimum acceptable rate of return of 15%. Assume straight-line depreciation.

**a.** Determine the equal annual net cash flows
from operating the equipment. Round to the nearest dollar.

$

Present Value of an Annuity of $1 at
Compound Interest |
|||||

Year |
6% |
10% |
12% |
15% |
20% |

1 | 0.943 | 0.909 | 0.893 | 0.870 | 0.833 |

2 | 1.833 | 1.736 | 1.690 | 1.626 | 1.528 |

3 | 2.673 | 2.487 | 2.402 | 2.283 | 2.106 |

4 | 3.465 | 3.170 | 3.037 | 2.855 | 2.589 |

5 | 4.212 | 3.791 | 3.605 | 3.352 | 2.991 |

6 | 4.917 | 4.355 | 4.111 | 3.784 | 3.326 |

7 | 5.582 | 4.868 | 4.564 | 4.160 | 3.605 |

8 | 6.210 | 5.335 | 4.968 | 4.487 | 3.837 |

9 | 6.802 | 5.759 | 5.328 | 4.772 | 4.031 |

10 | 7.360 | 6.145 | 5.650 | 5.019 | 4.192 |

**b.** Calculate the net present value of the new
equipment using the present value of an annuity of $1 table above.
Round to the nearest dollar. If required, use the minus sign to
indicate a negative net present value.

Annual net cash flow | $ |

Present value of equipment cash flows | $ |

Less equipment costs | $ |

Net present value of equipment | $ |

Answer #1

(a): Equal annual net cash flows = Revenues – Total expenses

Now total expenses will have to be adjusted for depreciation. Depreciation per year = 125,000/5 = $25,000 per year.

Thus expenses without depreciation = annual expenses - depreciation = 125,000-25,000 = $100,000

Equal annual net cash flows = 155,000 -100,000

= $55,000

b. Present value of equipment cash flows = 55,000*Present value of annuity for 5 years and 15%

= 55,000*3.352

= $184,360

Thus net present value = present value of annual cash flows - investment

= $184,360 - 125,000

= $59,360

Annual net cash flow | $ | 55,000.00 |

Present value of equipment cash flows | $ | 184,360.00 |

Less: equipment costs | $ | 125,000.00 |

Net present value of the equipment | $ | 59,360.00 |

A project is estimated to cost $191,850 and provide annual net
cash flows of $50,000 for eight years.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968...

A project is estimated to cost $454,730 and provide annual net
cash flows of $74,000 for 10 years.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582
4.868
4.564
4.160
3.605
8
6.210
5.335
4.968...

Spanish Peaks Railroad Inc. is considering acquiring equipment
at a cost of $208,000. The equipment has an estimated life of 10
years and no residual value. It is expected to provide yearly net
cash flows of $52,000. The company's minimum desired rate of return
for net present value analysis is 12%.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3...

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A project has estimated annual net cash flows of $11,250 for
five years and is estimated to cost $46,950. Assume a minimum
acceptable rate of return of 15%. Use the Present Value of
an Annuity of $1 at Compound Interest table below.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4...

Net Present Value A project has estimated annual net cash flows
of $8,750 for two years and is estimated to cost $44,726. Assume a
minimum acceptable rate of return of 12%. Use the Present Value of
an Annuity of $1 at Compound Interest table below. Present Value of
an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1
0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3
2.673 2.487 2.402 2.283 2.106 4...

Keystone Healthcare Corp. is proposing to spend $150,570 on a
10-year project that has estimated net cash flows of $30,000 for
each of the 10 years.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582...

Buckeye Healthcare Corp. is proposing to spend $120,640 on a
seven-year project that has estimated net cash flows of $29,000 for
each of the seven years.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589
5
4.212
3.791
3.605
3.352
2.991
6
4.917
4.355
4.111
3.784
3.326
7
5.582...

Buckeye Healthcare Corp. is proposing to spend $124,072 on a
nine-year project that has estimated net cash flows of $26,000 for
each of the nine years. Present Value of an Annuity of $1 at
Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870
0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283
2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352
2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582...

The Riverton Company,
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Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037...

The internal rate of return method is used by Testerman
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$13,000 for each of the nine years of its useful life.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855...

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