Byron Corp Is consldering the purchase of a new plece of equipment. The cost sav
ID: 2595662 • Letter: B
Question
Byron Corp Is consldering the purchase of a new plece of equipment. The cost savings from the equipment would result In an annual Increase in cash flow of $100,000. The equipment will have an Initial cost of $400,000 and have a 5 year life. The salvage value of the equipment Is estimated to be $75,000. lf the hurdle rate ls 10%, what is the approximate net present value? Ignore Income taxes. Euture value of$1 Round your Py tctors to 4 decimal places and final answer to the nearest dollar amount) o $(20,920) O $25,648 O $100.000 O $175.000Explanation / Answer
Answer = B $25,648
Initial cost = 400,000
Useful life = 5 years
Salvage value = 75,000
Cost of capital = 10%
Annual saving = 100,000
PVAF@10% for 5 years = 3.7908
PVF@10% of 5th Year = 0.6209
NPV = Present value of cash inflows + Present value of Salvage value – initial cash outflow
= (Annual cash inflow* PVAF@10% for 5 years) + (Salvage value* PVF@10% of 5th Year) - initial cash outflow
= (100,000*3.7908) + (75,000*0.6209) - 400,000
NPV = $25,647.5 or 25,648
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