Summit Inc purchases new equipment that costs $500,000 and will provide net cash

Question

Summit Inc purchases new equipment that costs $500,000 and will provide net cash inflows in the form of annual cost savings of $100,000 each year for 6 years. At the end of year 6, Summit will pend $50,000 to refurbish the equipment so that it can be used for one more year. The equipment will provide cost savings of $80,000 in year 7 and will have a residual value of $40,000 at the end of year 7. Summit uses a hurdle rate of 6% to make capital budgeting decisions. What is the net present value of this project? $71.500 $44,900 $36250 $9,650 None of the above

Explanation / Answer

None of the above.

Present value = Future cash flow/(1+rate)n – Initial Investment – Amount spend/(1+rate)n

= 100000/1.06 + 100000/1.062 + 100000/1.063 + 100000/1.064 + 100000/1.065 + 100000/1.066 – 50000/1.066 + 80000/1.067 + 40000/1.067 – 500,0000

= 536291.3 – 500,000 = 36291.3 $

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