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

Hi,

Please find the answer as follows;

Initial Outlfow = -240000

Annual Cash Inflow = Net Income + Depreciation = 24500 + 20000 = 44500

NPV = -240000 + 44500*PVIFA(8%,12 Years) = -240000 + 44500*7.5361 = 95356.45 or 93536

Answer is 93536.

Thanks.

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