Connor Company is considering the purchase of new equipment for $240,000. The ex

Question

Connor Company is considering the purchase of new equipment for $240,000. The expected life of the equipment is 10 years with no residual value. The equipment is expected to earn revenues of $152,000 per year. Total expenses, including depreciation, are expected to be $120,000 per year. Connor management has set a minimum acceptable rate of return of 6%. Assume straight-line depreciation. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar. 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. If required, use the minus sign to indicate a negative net present value.

Explanation / Answer

Particulars Amount($) Revenues for the year 152000 Less: Depreciation 24000 (240000/10) Expenses(120000-24000) 96000 Net annual cash flows 32000 Particulars Amount($) Annual net cash Flow 32000 Present value of equipment cash flows @6% 7.36 Less: Equipment costs 235520 Net present value of equipment 240000 Net Present value -4480

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