Net Present Value Method-Annuity Connor Company is considering the purchase of n

Question

Net Present Value Method-Annuity 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. Present Value of an Annuity of $1 at Compound Interest 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. Annual net cash flow Present value of equipment cash flows Less equipment costs Net present value of equipment.

Explanation / Answer

Annual Cash Flow=Revenue-Expenses

Revenue=$152,000+Depreciation=$152,000+(240,000/10)=$152,000+24,000=176,000

Expenses=$120,000

Annual cash Flow=$176,000-$120,000=$56,000

Net Present Value of the new equipment using the present value:

Annual cash flow= $56,000

Present value of equipment cash flow=56,000*7.36=$412,160

Less:Equipment cost                                                =$240,000

Net present value of equipment                               =$172,160

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