Question

Byron 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 $105,000. The equipment will have an initial cost of $430,000 and have a 5-year life. The salvage value of the equipment is estimated to be $82,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes

Answer 1

Answer:

Explanation:

outflow of fund = -430000

cash inflow per year for 5  years = 105000

salvage value = 82000

REQUIRED RATE OF RETURN = 10%.

NPV = - 430000 + 105000/ 1.1 + 105000/ 1.1² + 105000/ 1.1³ + 105 / 1.1 ⁴ + 105000 / 1.1 ⁵ + 82000 / 1.1 ⁵

= -430000+ 95454.5 + 86776.8 +78888 +71716 + 65196 + 50915.5

= -430000 + 448946.8

= 18946.8

Approximate NPV =  $ 18946.8 .