Beta Co. is considering whether to install additional equipment in one of its oi

Question

Beta Co. is considering whether to install additional equipment in one of its oil fields. The equipment, which would cost $4,000 at Time 0, would have a life of five years and be depreciated using the straight-line method (that is, depreciation expense would be $800 per year). Maintenance and other cash operating expenses would be $1,000 in Year 1, $1,200 in Year 2, $1,400 in Year 3, $1,600 in Year 4, and $1,800 in Year 5. The equipment would generate savings of $2,400 in each of the five years. What is the accounting net income for the project in Year 1? What is the accounting rate of return on assets for the project in Year 1? What is the net cash flow for the project in Year 1? What is the net present value of the project at a hurdle rate of 10%?

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks Initial Cost =$4000 Year Expense Revene cashflow year 1 1000 2400 1400 year 2 1200 2400 1200 year 3 1400 2400 1000 year 4 1600 2400 800 year 5 1800 2400 600 Depreciation = $800 1. Net income = $1400 - $800 = $600 2. Rate of return = $600 / $4000 = 15% 3. Net cash flow = $2400 - $1000 = $1400 NPV = -$4000 + 1400/1.1+ 1200/1.1^2+ 1000/1.1^3+ 800/1.1^4+ 600/1.1^5 = -$65.26

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