Pronghorn Industries is considering the purchase of new equipment costing $552,0
ID: 2570472 • Letter: P
Question
Pronghorn Industries is considering the purchase of new equipment costing $552,000 to replace existing equipment that will be sold for $82,800. The new equipment is expected to have a $92,000 salvage value at the end of its 2-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 13,800 units annually at a sales price of $9 per unit. Those units will have a variable cost of $6 per unit. The company will also incur an additional $41,400 in annual fixed costs.
(a) Calculate the net present value of the proposed equipment purchase. Assume that Pronghorn uses a 6% 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).)
Explanation / Answer
Annual net cash flows =13800*(9-6)-41400= 0 Net investment = 552000-82800= 469200 a Now Year 1 Year 2 Net investment -469200 Annual net cash flows 0 0 Salvage value 92000 Total cash flows -469200 0 92000 PV factor 1 0.9434 0.89 Present values -469200 0 81880 Net Present value -387320
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