Concord Industries is considering the purchase of new equipment costing $852,000

Question

Concord Industries is considering the purchase of new equipment costing $852,000 to replace existing equipment that will be sold for $127,800. The new equipment is expected to have a $142,000 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 21,300 units annually at a sales price of $14 per unit. Those units will have a variable cost of $9 per unit. The company will also incur an additional $63,900 in annual fixed costs. Click here to view the factor table. (a) Calculate the net present value of the proposed equipment purchase. Assume that Concord uses a 9% 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 Concord Industries invest in the new equipment?

Explanation / Answer

Annual net cash flows =21300*(14-9)-63900= 42600 Net investment = 852000-127800= 724200 a Now Year 1 Year 2 Year 3 Net investment -724200 Annual net cash flows 42600 42600 42600 Salvage value 142000 Total cash flows -724200 42600 42600 184600 PV factor 1 0.9174 0.8417 0.7722 Present values -724200 39081 35856 142548 Net Present value -506714 b No Note: Final answer might vary + 1

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