Exercise 11-9 Computing net present value LO P3 828 Co. is considering the purch

Question

Exercise 11-9 Computing net present value LO P3 828 Co. is considering the purchase of equipment that would allow the company to add a new product to its line The equipment is expected to cost $382,400 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis The company expects to sell 152,960 units of the equipment's product each year. The expected annual income related to this equipment follows Sales Costs Materials, labor, and overhead (except depreciation on new equipment) 84,000 38, 240 23.9e0 146,140 Depreciation on new equipment selling and administrative expenses Total costs and expenses Pretax income Income taxes (20%) Net income 92,860 5 74,288 e the net present value of this investment If at least an 9% return on this investment must be earned, c PVA of S1. and FVA df S1) (Use appropriate factor(s) from the tables provided.) Chart Values are Based on

Explanation / Answer

the following table shows the NPV calculation:

note:

annual cash inflows from year 1 to year 10 = net income + depreciation = 74,288+38,240

=>112,528.

present value of annuity factor for 9% for 10 years, can be had from PVA of $1 tables.

alternatively the formula to be used is:

[1 - (1+r)^(-n)] / r

=>r = 0.09

n = 10 years.

=>[1 - (1.09)^(-10)] / 0.09

=>[ 0.5775892]/0.09

=>6.41766.

year cash flow discounting factor @ 9% discounted cash flow 0 (382,400) 1 (382,400) 1-10 112,528 6.41766 (from PVA of $1 table) 722,166.44 Net present value 339,766.44

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