Grady Corp. is considering the purchase of a new piece of equipment. The equipme

Question

Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $51,900, and will have a salvage value of $5,170 after eight years. Using the new piece of equipment will increase Grady’s annual cash flows by $6,180. Grady has a hurdle rate of 14%. (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.)

a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.)

b. What is the present value of the salvage value? (Round your answer to 2 decimal places.)

c. What is the net present value of the equipment purchase? (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 purchase the equipment? Yes No

Explanation / Answer

a Present value of the increase in annual cash flows =6180*4.6389= 28668.40 b Present value of the salvage value = 5170*0.3506= 1812.60 c Net present value of the equipment = (28668.4+1812.6)-51900= -21419 d No

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