Exercise D9-7 Martinez Industries is considering the purchase of new equipment c

Question

Exercise D9-7 Martinez Industries is considering the purchase of new equipment costing $348,000 to replace existing equipment that will be sold for $52,200. The new equipment is expected to have a $58,000 salvage value at the end of its 1-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 8,700 units annually at a sales price of $6 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $26,100 in annual fixed costs. Click here to view the factor table a Calculate the net present value of the proposed equipment purchase. Assume that Martinez uses a 4% discount rate. For ca cu on ur oses use 4 decima places as displayed in the factor table provided and round final answer to O decimal place,e.g. 58,971. Enter negative amount using a negative sign preceding the number for e.g. -59,992 or parentheses e.g. (59,992).) Net present value (b) Do you recommend that Martinez Industries invest in the new equipment?

Explanation / Answer

Exercise D9-7 a. Costs of new Equipment        3,48,000 Sales Price of old price            52,200 Net Costs of new Equipment        2,95,800 b. Contribution Margin Income Statement: Per Unit Total Sales $               6 $        52,200 Variable Costs $               3 $        26,100 Contribution Margin $               3 $        26,100 Fixed Costs $        26,100 Net Income 0 c. Present Value of Income 0 x               0.9615 = 0 Present Value of salvage Value 58000 x               0.9615 = $       55,769 Total Present Value of cash flows $        55,769 Costs of Investment        2,95,800 Net Present Value $ -2,40,031 Thus, (a) Net Present Value $ -2,40,031 (b) No Due to Negative Net Prersent Value, it is not beneficial to invest in new machine.

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