Grady Corp. is considering the purchase of a new piece of equipment. The equipme

Question

Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $52,000, and will have a salvage value of $5,020 ater nine years. Using the new plece of equipment will increase Gradys annual cash flows by $6,150 Grady has a hurdle rate of 9%. E t revalue f 1, Presentv ue f$1, Futu evalueAnn it or 1, Present alueA nuity L) Use appropriate factor from the PV tables.) a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.] b. What is the present value of the salvage value? (Round your answer to 2 decimal places.) c. What is the net present value of the equipment purchase? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.) d. Based on financial factors, should Grady purchase the equipment? Yes No

Explanation / Answer

Answer to A

Present Value = 6150 x PVAF(9%, 9)Or

= 6150 x 5.99524

= $36870.77

Answer to B

Present Value = Salvage value x PVF(9%, 9)

= 5020 x 0.460428

= $2311.35

Answer to C

Answer to D

No, as the prohect has negative NPV therefore it is not acceptable.

Year Cash Flow PVF at 9% Present Value 1 6150 0.917431 5642.202 2 6150 0.84168 5176.332 3 6150 0.772183 4748.928 4 6150 0.708425 4356.815 5 6150 0.649931 3997.078 6 6150 0.596267 3667.044 7 6150 0.547034 3364.261 8 6150 0.501866 3086.478 9 6150 0.460428 2831.631 Present Value 36870.77

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