Connor Company is considering the purchase of new equipment for $76,000. The exp

ID: 2447229 • Letter: C

Question

Connor Company is considering the purchase of new equipment for $76,000. The expected life of the equipment is 4 years with no residual value. The equipment is expected to earn revenues of $103,000 per year. Total expenses, including depreciation, are expected to be $95,000 per year. Connor management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation.

a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar.
$

b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar.

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

Revenue

(-) Expenses [including Depreciation]

103000

95000

Net profit

Add:- Non cash item (Depreciation) 76000 / 4

8000

19000

Annual net cash flow

27000

NPV = Present value of cash inflow – Present value of cash outflow

= 152550

(Note 1) 5.650 is the cumulative present value factors @ 12 % for 10 Years.

NPV = 152550 – 76000 = $76550

Conclusion: - Net present value of equipment = $76550