Grady Corp. is considering the purchase of a new piece of equipment. The equipme
ID: 2658488 • Letter: G
Question
Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,100, and will have a salvage value of $5,120 after six years. Using the new piece of equipment will increase Grady’s annual cash flows by $6,090. Grady has a hurdle rate of 10%. (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?
Explanation / Answer
a.
Increase in annual cash flows = $6,090
Present value of annuity of $1 = {1-(1+r)-n}/r = (1-1.10-6)/0.10 = 4.35526
Present value of increase in annual cash flows = $6,090 * 4.35526 = $26,523.53
b.
Salvage value = $5,120
Present value of $1 = 1/(1+r)n = 1/1.106 = 0.56447
Present value of salvage value = $5,120 * 0.56447 = $2,890.09
c.
Net present value of equipment purchase = -Cost of equipment + Present value of increase in annual cash flows + Present value of salvage value
Net present value of equipment purchase = - $50,100 + $26,523.53 + $2,890.09 = -$20,686.38
d.
No, Grady should not purchase the equipment because its net present value is negative.
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