Connor Company is considering the purchase of new equipment for $182,000. The ex
ID: 2371824 • Letter: C
Question
Connor Company is considering the purchase of new equipment for $182,000. The expected life of the equipment is 7 years with no residual value. The equipment is expected to earn revenues of $157,000 per year. Total expenses, including depreciation, are expected to be $130,000 per year. Connor management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation.
a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar.
$
b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar.
c. Does your analysis support the purchase of the new equipment?
SelectYesNoItem 6
Explanation / Answer
To do that, you need to take the $68,000/(1.15)^1, then $68,000/(1.15)^2, then $68,000/(1.15)^3 and so on changing that last figure (the exponent) all the way up to 6. The results should be something like year 1 = $59,130.43
year 2 = $51,417.72
year 3 = $44,710.37 and so on three more times each one decreasing in value.
When you add all 6 years together you should get $257,345 (rounded).
The short formula is to take the $68,000 * (1-(1-.15)^-6)/0.15 = $257,345 which is the formula for the PV of an annuity.
Basically, if you are the CFO running Connor Co. you make the decision to buy the equipment because at $180k, you notice it's a steal worth $257k after doing the 6-year financial model.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.