Whispering Winds Industries is considering the purchase of new equipment costing
ID: 2567928 • Letter: W
Question
Whispering Winds Industries is considering the purchase of new equipment costing $1,222,000 to replace existing equipment that will be sold for $185,200. The new equipment is expected to have a $219,000 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 35,100 units annually at a sales price of $24 per unit. Those units will have a variable cost of $12 per unit. The company will also incur an additional $92,400 in annual fixed costs er Calculate the present value of each cash flow assuming an 7% 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 amounts using a negative sign preceding the number e.g.-58,971 or parentheses e.g. (58,971).) Cash Flow Present Value Purchase of new equipment Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment $Explanation / Answer
Increase in Sales revenue = 35,100 units * 24 per unit = 842,400
Present value annuity factor of 7% for 4 years = 0.9345 + 0.8734 + 0.8162 + 0.7628 = 3.3869
Present value of Sales revenue = 842,400 * 3.3869 = 2,853,125
Increase in variable costs = 35,100 units * 12 per unit = 421,200
Present value of Variable costs = 421,200 * 3.3869 = 1,426,562
Additional Fixed costs = 92,400
Present value of Additional Fixed costs = 92,400 * 3.3869 = 312,950
Salvage value of new equipment = 219,000
Present value Salvage value of new equipment = 219,000 * 3.3869 = 741,731.
Cash Flow Present Value Purcahse of new equipment (1,222,000) Salvage of old equipment 185,200 Sales revenue 2,853,125 Variable costs (1,426,562) Additional fixed costs (312,950) Salvage of new equipment 741,731Related Questions
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