Exercise D9-1 Metro Industries is considering the purchase of new equipment cost

Question

Exercise D9-1 Metro Industries is considering the purchase of new equipment costing $1,200,000 to replace existing equipment that will be sold for $180,000. The new equipment is expected to have a $200,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 30,000 units annually at a sales price of $20 per unit. Those units will have a variable cost of $12 per unit. The company will also incur an additional $90,000 in annual fixed costs. Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45.) Timing Amount Cash Flow Purchase of new equipment $ Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment

Explanation / Answer

Identify amount and timing :

Cash flow Timing Amount Purchase of new equipment Year 0 -1200000 Salvage of old equipment Year 0 180000 Sales revenue Year 1-4 600000 Variable costs Year 1-4 -360000 Additional fixed costs Year 1-4 -90000 Salvage of new equipment Year 4 200000

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