Exercise 9-7 Bridgeport Industries is considering the purchase of new equipment

ID: 2514085 • Letter: E

Question

Exercise 9-7 Bridgeport Industries is considering the purchase of new equipment costing $792,000 to replace existing equipment that will be sold for $118,800. The new equipment is expected to have a $132,000 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 19,800 units annually at a sales price of $13 per unit. Those units will have a variable cost of $8 per unit. The company will also incur an additional $59,400 in annual fixed costs. Click here to view the factor table. (a) Calculate the net present value of the proposed equipment purchase. Assume that Bridgeport uses a 8% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number e.g. -59,992 or parentheses e.g. (59,992).) Net present value $ (b) Do you recommend that Bridgeport Industries invest in the new equipment? Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Calculation of net present value

4(salvage)

257,400

132,000

0.9259

0.8573

0.7938

Present value

238,326

220,669

204,324

104,781

768,100

Present value of all cash flowos = $768,100

Less: Present value of initial investment = $ 792,000

Net Present Value = - $ 23,900

Answer for A is - $ 23,900

Answer for B is it is recomanded for investment, because NPV is in negative.

Year Cash flows Present value of $1 @ 8% (discount factor) using present value table $ Present value of net cash floe $