Exercise 24-6 Computing net present value L.O. P3 K2B Co. is considering the pur

Question

Exercise 24-6 Computing net present value L.O. P3

K2B 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 $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 96,000 units of the equipment%u2019s product each year. The expected annual income related to this equipment follows. (Use Table B.3)

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. Omit the "$" sign in your response.)

K2B 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 $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 96,000 units of the equipment%u2019s product each year. The expected annual income related to this equipment follows. (Use Table B.3)

Explanation / Answer

Total cash outflows (before tax) = 115000 - 20000 = $95000

Net cashflow per year before tax = 150000 - 80000 - 15000 = $55000

Net cashflow per year after tax = 55000 x 0.7 = $38500

Annuity factor at 8% for 12 years = 7.5361

NPV = -240000 + 38500 x 7.5361 = +$50139.85


NPV is positive, this investment project should not be rejected

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