Exercise 24-9 Computing net present value LO P3 B2B Co. is considering the purch

Question

Exercise 24-9 Computing net present value LO P3 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 $374,400 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis.The company expects to sell 149,760 units of the equipment's product each year. The expected annual income related to this equipment follows. If at least an 8% return on this stment must be eaned, compute the net present value. (PV of $1, FV of $1, PVA of $1, and FVA of S1) (Use appropriate factor(s) from the tables provided.) 234,000 Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses 82,000 31,200 23,400 Total costs and expenses 136,600 Pretax income Income taxes (30%) 97,400 29,220 Net income $ 68,180

Explanation / Answer

Annual net cash flows = Net income + Depreciation = $68180 + $31200 = $99380

Depreciation being a non-cash expense is added back to the net income to arrive at the net cash flow.

Note: PV Factor used is upto 3 decimal places. Kindly use the factor per the table provided.

Chart Values are Based on: n = 12 i = 0.08 Select Chart Amount x PV Factor = Present Value PVA of $1 99380 x 7.536 = 748927.68 Cost of equipment -374400 Annual net cash flows 748927.68 Net present value 374527.68

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