Grady Corp is considering the purchase of a new piece of equipment. The equipmen
ID: 2494077 • 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
a.
Present value of increase in annual cash flows = $6000 * 5.3282 = $31969.2
b.
Present value of salvage = $5000 * 0.3606 = $1803
c.
Net present value of equipment purchase = PV of cash inflow - Initial investment= ($31969.2+$1803) - $50000
= -$16227.8
d.
Since NPV of equipment is negative i.e. -$16227.8 therefore equipment should not be purchased
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