15. Newport Corp. is considering the purchase of a new piece of equipment. The c

Question

15. Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $205,000. The equipment will have an initial cost of $974,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.)

Explanation / Answer

Present value factor

= 1 / (1 + r) ^ n

Where,

r = Rate of interest = 8% or 0.08

n = Years = 6

So, PV Factor for year 2

= 1 / (1.08 ^ 2)

= 1 / 1.1664

= 0.857338

Similarly, other calculations are shown in the following table

Calculations Years 0 1 2 3 4 5 6 A Cash Flows (974,000.00)    205,000.00    205,000.00    205,000.00    205,000.00    205,000.00    205,000.00 B PV Factor         1.000000       0.925926       0.857339       0.793832       0.735030       0.680583       0.630170 C = A x B Present value (974,000.00)    189,814.81    175,754.46    162,735.61    150,681.12    139,519.56    129,184.77 D = Sum C Net Present Value           (26,310)

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.