34.) Newport Corp is considering the purchase of a new piece of equipment. The c

Question

34.)

Newport 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 $271,000. The equipment will have an initial cost of $2,439,000 and have a 8 year life. There is no salvage value for the equipment. What is the payback period?

0.89 years

9.00 years

4.24 years

8.00 years

35.)

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 $111,000. The equipment will have an initial cost of $475,000 and have a 5 year life. The salvage value of the equipment is estimated to be $79,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Round your PV factors to 4 decimal places and final answer to the nearest dollar amount.)

zero

positive $79,000

negative $5,170

positive $475,000

Newport 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 $271,000. The equipment will have an initial cost of $2,439,000 and have a 8 year life. There is no salvage value for the equipment. What is the payback period?

Explanation / Answer

Solution:

34)

Correct Answer is 9.00 years

Payback period is the length of time within which initial investment is returned back to the company. Simple payback period does not consider Time Value of Money.

Since the annual cash flow is uniform in each year, the following formula can be used to calculate payback period:

Payback Period = Initial Investment / Uniform Cash flow

= $2,439,000 / $271,000

= 9 years

35)

Correct Answer is negative $5,170

Net Present Value = Present Value of Cash flows – Present Value of Cash Outflow

Present Value of Cash Outflow = Initial Investment Cost = $475,000

Present Value of Cash Flows = Annual Cash flows x PVIFA (10%, 5) + Salvage Value of equipment x PVIF (10%, 5)

= ($111,000 x 3.790787) + ($79,000x 0.620921)

= $420,777 + $49,053

= $469,830

Net Present Value = $469,830 - $475,000 = -- $5,170

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