(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition
ID: 2466700 • Letter: #
Question
(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $570,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:
Click here to view Exhibit 8B-1 to determine the appropriate discount factor(s) using tables.
If the discount rate is 13%, the net present value of the investment is closest to:
$148,761
$505,000
$659,213
$89,213
(Ignore income taxes in this problem.) Gull Inc. is considering the acquisition of equipment that costs $570,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are:
Explanation / Answer
Calculate the Net present value:
Year
Cash flows
Discounting factor
@13%
Discounted
cash flows
0
$ (570,000.00)
1
$ (570,000.00)
1
$ 150,000.00
0.88496
$ 132,744.00
2
$ 200,000.00
0.78315
$ 156,630.00
3
$ 161,000.00
0.69305
$ 111,581.05
4
$ 170,000.00
0.61332
$ 104,264.40
5
$ 160,000.00
0.54276
$ 86,841.60
6
$ 140,000.00
0.48032
$ 67,244.80
NPV
$ 89,213
Therefore, the correct answer is $89,213.
Year
Cash flows
Discounting factor
@13%
Discounted
cash flows
0
$ (570,000.00)
1
$ (570,000.00)
1
$ 150,000.00
0.88496
$ 132,744.00
2
$ 200,000.00
0.78315
$ 156,630.00
3
$ 161,000.00
0.69305
$ 111,581.05
4
$ 170,000.00
0.61332
$ 104,264.40
5
$ 160,000.00
0.54276
$ 86,841.60
6
$ 140,000.00
0.48032
$ 67,244.80
NPV
$ 89,213
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