Problem Plotter Company is considering the purchase of new computers from Lenovo

ID: 2597527 • Letter: P

Question

Problem Plotter Company is considering the purchase of new computers from Lenovo for its would capital would for its accounting office. The compute At that point the working ted after three years of use using the straight-line depreciation method. be exhaust following cost analysis $ 320,000 be released for reinvestment elsewhere. The company's accountants provided the f $ 130,000 Sales Revenue Cost of Equipment Working Capital Cost to Maintain Equipment in year 2 5,000 Depreciation Expense 25,000 Variable Expenses $ 25,000 Variable Expenses 175,000 Salvage value ofEquipmentinyear3 S- 10,000 Fixed Expenses.. -The fxed expenses of $65,000 do not include depreciation expense Required: Compute the annual cash inflow associated with the new computers. Required: Compute the payback period associated with the new computers Required: Would the company purchase the computers if it has a maximum payback period of 2.15 ye ars? Explain. Required: Calculate the net present value of the potential purchase of the new company has a cost of capital of 12% computers from Lenovo considering the Now: Year 1: Year 2: Year 3: Total Cash Flows Present Value (PV) et Present Value (NPV)

Explanation / Answer

1. Calculation of annual cash flows:

Cash inflows = Sales Revenue - Variable Cost - Fixed expenses

= 320,000 - 175,000 - 65,000 = $80,000

Note: Depreciation is a non- cash expense and is irrelevant for cash inflows

2. Payback Period = Total Investment / Cash Inflows

Total Investment = 130,000 + 25,000 + 5,000 = $160,000

Cash Inflows = $80,000

Payback Period = 160,000 / 80,000 = 2 years

3. If maximum payback period is 2.15 years, then the company should purchase the computers as the payback period of computers is 2 years which is less then company's maximum payback period.

4. Calculation of Net Present Value

Now

Year 1

Year 2

Year 3

Initial Investment

(130,000)

Working Capital

(25,000)

Cash Inflows

80,000

Cost of maintenance

(5,000)

Salvage Value

10,000

Working capital release

25,000

Total Cash flows

(155,000)

80,000

75,000

115,000

Present Value Factor at 12%

1 / (1 + 12%)time

0.893

0.797

0.712

Present Value

(155,000)

71,440

59,775

81,880

Net Present Value

58,095

5. Since the NPV of purchasing computers is positive, the company should purchase the computers.

Now