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 $100,000. The equipment will have an initial cost of $400,000 and have a 5 year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the approximate net present value

Answer 1

Answer:

$25,647.78

Explanation:

The Net Present Value is the value today of future cashflows discounted by the effective interest rate. In this case the interest rate is the hurdle rate of 10%.

Using a financial calculator, this will be calculated by the CFj function as follows :

($400,000)    CF 0

$100,000       CF 1

$100,000       CF 2

$100,000       CF 3

$100,000       CF 4

$175,000        CF 5

i/yr = 10%

then SHIFT NPV

Inputting the data in the calculator above, we get a net present value of $25,647.78