Haworth Company is considering the purchase of a labor saving piece of equipment

Question

Haworth Company is considering the purchase of a labor saving piece of equipment with the following information:

Purchase cost of equipment                                                                         $432,000

Annual cost savings, excluding depreciation (end of year)                  $90,000

Terminal salvage value                                                                                                0

Useful life of equipment                                                                                  12 years

Required rate of return                                                                                            10%

Tax rate                                                                                                                        30%

Depreciation method for tax purposes                                               Straight-line

Present value of ordinary annuity of one

at 10% for 12 periods                                                                                           6.8137

Present value of one at 10% for 12 periods                                                   0.3186

What is the net present value of the equipment? SHOW WORK

Explanation / Answer

432000/12=36000 depreciation

PV Factor Purchase cost of equipment -432000 1 -432000 After tax Annual cost savings 1-12 90000*(1-.30) 63000 6.8137 429263.1 Deprecization tax saving =(36000*.30) 10800 6.8137 73587.96 net present value of the equipment 70851.06

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