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