B2B Co. is considering the purchase of equipment that would allow the company to
ID: 2416729 • Letter: B
Question
B2B 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 $372,800 with a 5-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 10% return on this investment. The company expects to sell 149,120 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
Sales $ 233,000
Costs
Materials, labor, and overhead (except depreciation) 82,000
Depreciation on new equipment 74,560
Selling and administrative expenses 23,300 Total costs and expenses 179,860 Pretax income 53,140
Income taxes (30%) 15,942 Net income$37,198
Explanation / Answer
calculation of cash flows= net income + tax savings on depreciation= $ 37,198+$74 560*30/100
=$ 37,560+$ 22,368
= $ 59,928
npv = -$ 372,800- $ 59.928* 3.791
= -$ 372,800-$ 227,174
= -$ 145,626
net present value is negative
so this project taken is not good decision
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