B2B Co. is considering the purchase of equipment that would allow the company to

Question

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $369,600 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 147,840 units of the equipment’s product each year. The expected annual income related to this equipment follows. Sales $ 231,000 Costs Materials, labor, and overhead (except depreciation on new equipment) 81,000 Depreciation on new equipment 61,600 Selling and administrative expenses 23,100 Total costs and expenses 165,700 Pretax income 65,300 Income taxes (30%) 19,590 Net income $ 45,710 If at least an 8% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Chart Values are Based on: n = i = Select Chart Amount x PV Factor = Present Value = Net present value

Explanation / Answer

Cash inflows = Net income + Depreciation

= 45,710 + 61,600

= 107,310

PVAF of 8% for 6 years = 4.623

Present value of cash Inflows = 107,310 * 4.623 = 496,094.13

Present value of cash outflows = 369,600

Net present value = Present value of cash inflows - Present value of cash outflows

Net present value = 496,094.13 - 369,600 = 126,494.13

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