Sarasota Industries is considering the purchase of new equipment costing $324,00

Question

Sarasota Industries is considering the purchase of new equipment costing $324,000 to replace existing equipment that will be sold for $48,600. The new equipment is expected to have a $54,000 salvage value at the end of its 1-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 8,100 units annually at a sales price of $5 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $24,300 in annual fixed costs.

Click here to view the factor table.

(a) Calculate the net present value of the proposed equipment purchase. Assume that Sarasota uses a 4% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number for e.g. -59,992 or parentheses e.g. (59,992).)

(b) Do you recommend that Sarasota Industries invest in the new equipment?

Explanation / Answer

NPV at 4% Present value of contribution earned 15576.3 (8100 units @$2 per unit * PVF of Year-1 i.e. 0.9615) Present value of salvage value of new equipment 51921 ($ 54000 * PVF of Year-1 i.e. 0.9615) Less: Present value of additional fixed cost -23364.5 ($ 24300 * PVF at Year-1 i.e. 0.9615) Less: Initial investment (324000-48600) -275400 Net Present value -231267 No Project is not recommended

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