Company XYZ is considering the purchase of a new printer. The new printer would

Question

Company XYZ is considering the purchase of a new printer. The new printer would cost $34,000, and it is expected to generate net after-tax operating cash flows, including depreciation, of $10,000 per year. The printer has a 5-year expected life. The expected salvage values after tax adjustments for the printer are given below. The company's cost of capital is 12%.

year 1 - 29,000 net salvage value
year 2 - 23,000 net salvage value
year 3 - 18,000 net salvage value
year 4 - 10,000 net salvage value
year 5 - 0 net salvage value

What should the company do? Please show work for each year.

Explanation / Answer

Net PV = pv of salvage + pv of all cash flows - cost

this maximizes in year 3

So the company should sell the printer after use in year 3

Please rate my answer!

thanks in advance :)

Year Cash Flow PV at 12% rate of cumulative CF Salvage Value PV at 12% rate of Salvage Net PV 1 10,000 8,928.57 29,000.00 25,892.86 821.43 2 10,000 16,900.51 23,000.00 18,335.46 1,235.97 3 10,000 24,018.31 18,000.00 12,812.04 2,830.36 4 10,000 30,373.49 10,000.00 6,355.18 2,728.67 5 10,000 36,047.76 -   -   2,047.76

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