Question 1 Ayayai Industries is considering the purchase of new equipment costin

Question

Question 1

Ayayai Industries is considering the purchase of new equipment costing $288,000 to replace existing equipment that will be sold for $43,200. The new equipment is expected to have a $48,000 salvage value at the end of its 1-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 7,200 units annually at a sales price of $5 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $21,600 in annual fixed costs.

Click here to view the factor table.

(a) Calculate the net present value of the proposed equipment purchase. Assume that Ayayai uses a 4% 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 Ayayai Industries invest in the new equipment

Explanation / Answer

Net present value of the proposed equipment purchase is as shown below:

Ayayai Industries shouln not invest in the new equipment as the NPV is negative.

Purchase of new Equipment Year 0 Year 1 Total Cost of New equipment ($288,000) Sale of old equipment 43,200 Salvage Value of new equipment $48,000 Revenue from use of equipment (7,200*5) $36,000 Variable Cost from use of equipment (7,200*3) ($21,600) Fixed Cost ($21,600) Net Cash Flow ($244,800) $40,800 Life 1 years Rate of Return is 4% Present Value factor (b) 1 0.9615 Present Value of Net Cash flow (a*b) -244,800.00 39,230.77 -205,569

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