15. Newport Corp. is considering the purchase of a new piece of equipment. The c
ID: 2591175 • Letter: 1
Question
15. Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $205,000. The equipment will have an initial cost of $974,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)
Explanation / Answer
Present value factor
= 1 / (1 + r) ^ n
Where,
r = Rate of interest = 8% or 0.08
n = Years = 6
So, PV Factor for year 2
= 1 / (1.08 ^ 2)
= 1 / 1.1664
= 0.857338
Similarly, other calculations are shown in the following table
Calculations Years 0 1 2 3 4 5 6 A Cash Flows (974,000.00) 205,000.00 205,000.00 205,000.00 205,000.00 205,000.00 205,000.00 B PV Factor 1.000000 0.925926 0.857339 0.793832 0.735030 0.680583 0.630170 C = A x B Present value (974,000.00) 189,814.81 175,754.46 162,735.61 150,681.12 139,519.56 129,184.77 D = Sum C Net Present Value (26,310)Related Questions
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