ABC Company is considering the acquisition of a new piece of equipment to replace an old, outdated machine currently used in its
business operations. The new equipment would cost $135,000 and is expected to last 9 years. The new equipment would require a repair of $25,000 in year four and another repair costing $80,000 in year eight. Purchasing this new equipment would
require an immediate investment of $30,000 in working capital which would
be released for investment elsewhere at the end of the 9 years. The new
equipment is expected to have a $10,000 salvage value at the end of nine
years. The new equipment is expected to generate a cost savings of $60,000
per year. ABC Company has a cost of capital of 16% and an income tax rate
of 40%.
Required:
Calculate the net present value (NPV) of the new equipment.
require an immediate investment of $30,000 in working capital which would
be released for investment elsewhere at the end of the 9 years. The new
equipment is expected to have a $10,000 salvage value at the end of nine
years. The new equipment is expected to generate a cost savings of $60,000
per year. ABC Company has a cost of capital of 16% and an income tax rate
of 40%.
Required:
Calculate the net present value (NPV) of the new equipment.
1 answer:
Answer:
NPV is -$12,960
Explanation:
Net present value is the Net value all cash inflows and outflows in present value term. All the cash flows are discounted using a required rate of return.
In this question all the expenses are cash outflows and The cost saving is the cash inflow from the new machine investment.
Working for the NPV is attached with the answer please find it.
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