Exercise 9-1 Ayayai Industries is considering the purchase of new equipment cost

Question

Exercise 9-1 Ayayai Industries is considering the purchase of new equipment costing $1,330,000 to replace existing equipment that will be sold for $197,000. The new equipment is expected to have a $216,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 33,500 units annually at a sales price of $29 per unit. Those units will have a variable cost of $11 per unit. The company will also incur an additional $90,000 in annual fixed costs Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g.-45 or parentheses e.g. (45).) Cash Flow Timing Amount Purchase of new equipment Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment

Explanation / Answer

Identify amount and timing of all cash flows :

Cash flow Timing Amount Purchase of new equipment Year 0 -1330000 Salvage of old equipment Year 0 197000 Sales revenue Year 1-4 971500 Variable cost Year 1-4 -368500 Additional fixed cost Year 1-4 -90000 Salvage of new equipment Year 4 216000

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