Connor Company is considering purchasing new equipment for $145,000. The expecte

Question

Connor Company is considering purchasing new equipment for $145,000. The expected life of the equipment is 5 years with no residual value. The equipment is expected to generate revenues of $158,000 per year Total expenses, induding depreciation (calculated using the straight-line method), are expected to be $145,000 per year. Connor management has set a minimum acceptable rate of return of 15%. a. Determine the equal annual net cash flows from operating the equipment b. Calculate the net present value of the new equipment. Use the present valuc of an annuity of $1 table below if required, round to the nearest dollac If the net present value is negative, enter the amount using a minus sign Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.6901.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.60S 3.353 2.991 6 4.917 4.35S 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.9684.487 3.837 9 6.802 .759 5.328 47 4.031 10 7.360 6.145 5.650 5.019 4.192 Annual net cash flow Present value of cash flows from equipment Less cost of equipment Net present value of equipment c. Which of the following statements is correct regarding the purchase of the new equipment? a. The analyses support the purchase of the new equipment, becsuse the present value of the equipment's net cash flows exceeds its cost b. The analyses support the purchase of the new equipment, because c. The analyses support the pu chase of the new equip ert, because the prese"a e ofthe one rs et cash flo s seda to the present value of the equipment's net cash flows is less than its cost analyses do not support the purchase of the new equipment, because the net present value is regative. Select . ype here to search

Explanation / Answer

Answer: Depreciation amount we will have to add back to get the net cash flow.

Depreciation formula : (Cost of equipment - Salvage value) / no of years

Cost of eqipment = 145000

Salvage value = $0

Depreciation = 145000- 0 /5 = 29000

Answer A: Equal annual net cash flow : $42000

Answer B:

Annual net cash flow : $42000

Present value of cash flows from equipment : $42000*3.353 = $140826

3.353 value is arrived from the table given, n= 5 and rate of return 15%

Less cost of equipment : $145000

Net present value = ($140826 - $145000) = - $4174

Answer C: As the Net present value is negative analysis does not suggest to buy the equipment.

Option D is the answer

0 1 2 3 4 5 Equipment 145000 Revenue 158000 158000 158000 158000 158000 Expenses inclusing depreciation 145000 145000 145000 145000 145000 Depreciation amount 29000 29000 29000 29000 29000 Annual net cash flow from operating the equipment(Adding back depreciation) 42000 42000 42000 42000 42000

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