Lakeside, Inc., is considering replacing old production equipment with state-of-

Question

Lakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $450,000, with an estimated salvage value of $30,000. Lakeside's cost of capital is 10%, Table 6-4 and Table 6-5 (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) Required Calculate the present value ratio of the new production equipment. Round your answer to 2 decimal places.) Present value ratio

Explanation / Answer

Present value ratio = Present value of inflows / Initial investment

Present value ratio = $473,511 / $450,000

Present value ratio = 1.05

Year Annual cash flow (10,000*12) PV Factor PV of money 1 $                                         120,000 0.9091 $       109,092 2 $                                         120,000 0.8264 $         99,168 3 $                                         120,000 0.7513 $         90,156 4 $                                         120,000 0.683 $         81,960 5 $                                         150,000 0.6209 $         93,135 Present value of inflows $       473,511

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