Blue Spruce Industries is considering the purchase of new equipment costing $852

Question

Blue Spruce 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 Blue Spruce uses a 9% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to o decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number e.g.-59,992 or parentheses e.g. (59,99)) Net present value

Explanation / Answer

Annual Cash Inflow: Additional sales (21300 units@14) 298200 Less: Variable cost per unit(21300 units@9) 191700 Less: Additional fixed cost 63900 Annual cashinflows 42600 Present value of Annual cashinflows ($42,600 * Annuity factor@ 9% for 3 yrs i.e. 2.531) 107820.6 Add: Present value of salvage value at the end of third year (142,000*PV factor of 3rd year i.e. 0.772) 109624 Total present value of cash inflows 217444.6 Present value of Outflow in the form of initial investment 852,000 Less: Salvage value of existing machine 127800 Net Present value of cash outflows 724,200 Net Present value -506,755

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