Grady Corp is considering the purchase of a new piece of equipment. The equipmen
ID: 2460349 • Letter: G
Question
Grady Corp is considering the purchase of a new piece of equipment. The equipment costs $50,000, and will have a salvage value of $5,000 after nine years. Using the new piece of equipment will increase Grady's annual cash flows by $6,000. Grady has a hurdle rate of 12%. PV of Annuity (9 years, 12%) = 5.3282. PV of (9 years, 12%) = 0.3606.
a. What is the present value of the increase in annual cash flows?
b. What is the present value of the salvage value?
c. What is the net present value of the equipment purchase?
d. Based on financial factors, should Grady purchase the equipment? Why?
Explanation / Answer
Solution-a
Present value of the increase in annual cash flows = $6,000*5.3282
Present value of the increase in annual cash flows = $31,969.20
Solution-b
Present value of the salvage value = $5,000*0.3606
Present value of the salvage value = $1,803
Solution-c
Net present value of the equipment purchase = $31,969.20+$1,803 -$50,000
Net present value of the equipment purchase = ($16,227.80)
Solution-d
No, Grady will not purchase the equipment because the Net Present value is negative.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.