Byron Corp. is considering the purchase of a new piece of equipment. The cost sa
ID: 2534853 • Letter: B
Question
Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $117,000. The equipment will have an initial cost of $525,000 and have a 5 year life. The salvage value of the equipment is estimated to be $76,000. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)
Zero
Positive $76,000
Negative $6,129
Positive $525,000
Explanation / Answer
ANSWER - Negative $6,129
Workings
Annual Cash Inflow = $1,17,000
Useful Life = 5 Year
Discounting Rate = 8%
Initial Investment = $5,25,000
Net present value (NPV) at 8% = - $6,129 (Negative)
= [ $1,17,000 x (PVAF 8%,5 Years) + $76,000 x (PVF 8%,5 Years) ] - $5,25,000
= [ $1,17,000 x 3.99271 ] + [ $76,000 x 0.68058 ] - $5,25,000
= $4,67,147 + $51,724 - $525000
= - $6,129
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