Grady Corp. is considering the purchase of a new piece ot equipment Ine equipmen
ID: 2527328 • Letter: G
Question
Grady Corp. is considering the purchase of a new piece ot equipment Ine equipment casts S50,400, and will have a salvage value ot S5,110 atter nine years. Using the new piece ot equipment will increase Grady's annual cash tlows by $,160. Grady has a hurdle rate of 13% (Future ValueOft1 Present' al eOfS1. FutureValueAnnuity $1 Present Value Annuity 1.)(Use appropriate factor from the PV tables.) a. What is the present value of the increase in annual cash lows? (Round your answer to 2 decimal places. b. What is the present value of the salvage value? (Round your answer to 2 declimal places.) c. What is the net proscnt valuc of the oquipment purchasc? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.) d. Based on financial factors, should Grady Ruchase the equipment? O NoExplanation / Answer
a) PV of incremental annual cash flows = Annual cash flows * cumulative PV factor (13%,9)
= 6160 * 5.132
= $31613.12
b) PV of salvage value = salvage value * PV factor (13%, 9)
= 5110 * 0.333
= $1701.63
c) NPV of the equipment purchase =PV of annual cash flows + PV of salvage value - initial investment
= 31613.12 + 1701.63 - 50400
= -$17,085.3
d) No, Grady should not purchase the equipment as the NPV is negative.
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