Computing Net Present Value K2B Company is considering the purchase of equipment

Question

Computing Net Present Value K2B Company 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 $240,000 with a 12- year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows: K2B concludes that the investment must earn at least an 8% return. Compute the net present value of this investment. (Round the net present value to the nearest dollar.) PLEASE SHOW WORK.

Sales $150,000 Cost materials,labor,overhead (except depriciation) 80,000 depreciation on new equipment 20,000 selling and admin expenses 15,000 total costs and expenses 115,000 pretax income 35,000 income taxes (30%) 10,500 net income 24,500

Explanation / Answer

Answer:

The Yearly Cashflow from the investment = Net Income + Depreciation = $24,500+20,000 = $44,500

Present value of cashflow = Annual cashflow * [{(1+r)n-1} / {r*(1+r)n}], where r = required rate of return, n =no of periods

= $44,500 [{(1+0.08)12-1} / {0.08 * (1+0.08)12}] = $44,500 * (1.5182/0.20145) = $335,368

The NPV = PV of the cashflow - Initial Outflow = $335,368 - $240,000 = $95,368 (ans)

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