Flint Industries is considering the purchase of new equipment costing $1,044,000
ID: 2509561 • Letter: F
Question
Flint Industries is considering the purchase of new equipment costing $1,044,000 to replace existing equipment that will be sold for $156,600. The new equipment is expected to have a $174,000 salvage value at the end of its 3-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 26,100 units annually at a sales price of $17 per unit. Those units will have a variable cost of $10 per unit. The company will also incur an additional $78,300 in annual fixed costs. Click here to view the factor table. (a) Calculate the net present value of the proposed equipment purchase. Assume that Filnt uses a 10% discount rate. (For calculation purposes use 4 decimal places as disp ayed proided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number eg. 59,992 or Net present value $ (b) Do you recommend that Flint Industries invest in the new equipment?Explanation / Answer
Annual Contribution: Sales (26100 units @17) 443700 Less: variable c ost (26100 units @10) 261000 Contribution 182700 Present Annuity factor @10% for three years 2.4869 Present value of Contribution made 454356.6 Present value of salvage 130674 ($174,000*PVF i.e. 0.751) Total Present value 585030.6 Less: Net Initial investment 887400 ($ 1044,000-156,600) Net Present value -302369 Hence, Project should not be accepted
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