Anderson Corporation is considering investing $180,000 in equipment to produce a new product. Useful service life of the equipment is estimated to be 10 years, with zero salvage value. Straight-line depreciation will be used, i.e., $18,000 a year. The company estimates that production and sale of the new product to be produced by this new machinery will increase net income by $12,000 a year.
What is the annual future cash flow for this investment? (Show your work)
$________________
Using estimated cash flow numbers, please calculate the payback period for this investment.
________________ years
Assuming the company has a weighted average cost of capital of 12%, please calculate the present value of the estimated future cash flows. (You will need to use your TI BAII calculator.)
$________________
Having calculated the present value of the estimated future cash flows, should Anderson Corporation make this investment?
_________________