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 $380,800 with a 7-year life and no salvage value. It will be
depreciated on a straight-line basis. B2B Co. concludes that it must
earn at least a 9% return on this investment. The company expects to
sell 152,320 units of the equipment’s product each year. The expected
annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
| Sales | $ | 238,000 | |
| Costs | |||
| Materials, labor, and overhead (except depreciation) | 83,000 | ||
| Depreciation on new equipment | 54,400 | ||
| Selling and administrative expenses | 23,800 | ||
| Total costs and expenses | 161,200 | ||
| Pretax income | 76,800 | ||
| Income taxes (30%) | 23,040 | ||
| Net income | $ | 53,760 | |
Compute the net present value of this investment. (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)
|
Explanation:
| Annual Net Cash Flows* | Present Value of Annuity at 9% | Present Value of Net Cash Flows | ||||||||||
| Years 1 through 7 | $ | 108,160 | 5.0330 | $ | 544,369 | |||||||
| Amount to be invested | (380,800 | ) | ||||||||||
| Net present value of investment | $ | 163,569 | ||||||||||
| Based on this net present value analysis, the investment is acceptable. |
