Grouper Industries is considering the purchase of new equipment costing $1,237,0
ID: 2784907 • Letter: G
Question
Grouper Industries is considering the purchase of new equipment costing $1,237,000 to replace existing equipment that will be sold for $188,400. The new equipment is expected to have a $220,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 33,900 units annually at a sales price of $27 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $92,600 in annual fixed costs.
Calculate the present value of each cash flow assuming an 6% discount rate. (For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amounts using a negative sign preceding the number e.g. -58,971 or parentheses e.g. (58,971).)
Explanation / Answer
Year Cash flow Present Value factor Present Value Purchase on new equipment 0 (1,237,000) 1 (1,237,000) Salvage of old equipment 0 188,400 1 188,400 PV of annuity for making pthly payment P = PMT x (((1-(1 + r) ^- n)) / i) Where: P = the present value of an annuity stream PMT = the dollar amount of each annuity payment r = the effective interest rate (also known as the discount rate) i=nominal Interest rate n = the number of periods in which payments will be made Sale revenue=33900*27=915,300 =915300*(((1-(1 + 6%) ^-4)) /6%) 3,171,611 Variable cost=33900*15=508,500 =508500*(((1-(1 + 6%) ^-4)) /6%) 1,762,006 Additional Fixed Cost =92600*(((1-(1 + 6%) ^-4)) /6%) 320,869 Year Cash flow Present Value factor Present Value Salvage of new equipment 4 220,000 0.7921 174,261 PV factor=1/(1+r)^n
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