1 Net Present Value Nethod Annuity Connor Company is considering the purchase of

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1 Net Present Value Nethod Annuity Connor Company is considering the purchase of new equipment for $150,000. T of $181,000 per year. Total expenses, induding depreciation, are expected to be $1 new equipment for $150,000. The expected life of the equipment is 5 years with no residual value. The equipment is expected to earn revenes 50,000 per year. Connor management has set a minimum aceptable rate d return of 10%. Assume straight line depreciation. a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.2832.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.352 2.991 6 4.917 4.355 4.111 3.784 3.326 7 5.582 4.868 4.564 4.160 3.605 6.210 5.335 4,968 4,487 3.837 9 6.802 5.7595.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192 u uity of $1 table above. Round to the nearest dollar. if required, use the minus sign to indicate a value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest b. Calculate the net present negative net present value. s 568051 Annual net cash flow Present value of equipment cash flows Less equipment costs 56865 $18100. Precent value of equipment cash fows Ask me anything

Explanation / Answer

Connor company Details Amt $ Equipment cost                    150,000 Residual value                                -   Useful life in years                                 5 Yearly depreciation by SL method                         30,000 Annual expenses including depreciation                    150,000 Less Annual depreciation                    (30,000) Annual Cash expenses                    120,000 Expected annual revenue from the machine                    181,000 Less Annual Cash expenses                    120,000 a Equal Annual net Cash flow                       61,000 b Equal Annual net Cash flow                       61,000 PV annuity factor for $1 for 5 years @10%=                         3.791 PV of equal annual cash flows=61000*3.791=                    231,251 Less: Investment in equipment                  (150,000) NPV of investment                       81,251 c As the NPV is positive , the analysis supports the purchase of the equipment.

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