B2B Co. is considering the purchase of equipment that would allow the company to

Question

B2B 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 $380,800 with a 5-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 9% return on this investment. The company expects to sell 152,320 units of the equipment's product each year. The expected annual income related to this equipment follows. (PV of $1. FV of $1. PVA of $1. and FVA of $1) Compute the net present value of this investment.

Explanation / Answer

Solution.

Calculation of N.P.V.

Annual Cash inflow = $33,024 + $76,160 = $109,084.

Year Cash inflow Chart Value P.V 0        (380,800.00) 1.0000    (380,800.0000) 1          109,084.00 0.9174      100,073.6616 2          109,084.00 0.8416         91,805.0944 3          109,084.00 0.7721         84,223.7564 4          109,084.00 0.7084         77,275.1056 5          109,084.00 0.6499         70,893.6916 NPV             43,471.31

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