Connor Company is considering the purchase of new equipment for $182,000. The expected life of the equipment is 7 years with no residual value. The equipment is expected to earn revenues of $157,000 per year. Total expenses, including depreciation, are expected to be $130,000 per year. Connor management has set a minimum acceptable rate of return of 12%. Assume straight-line depreciation.
a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar.
$
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 |
1.690 |
1.626 |
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 |
3.605 |
3.353 |
2.991 |
| 6 |
4.917 |
4.355 |
4.111 |
3.785 |
3.326 |
| 7 |
5.582 |
4.868 |
4.564 |
4.160 |
3.605 |
| 8 |
6.210 |
5.335 |
4.968 |
4.487 |
3.837 |
| 9 |
6.802 |
5.759 |
5.328 |
4.772 |
4.031 |
| 10 |
7.360 |
6.145 |
5.650 |
5.019 |
4.192 |
b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar.
|
|
| Annual net cash flow: |
$ |
| Present value of equipment cash flows: |
$ |
| Less equipment costs: |
$ |
| Net present value of equipment: |
$ |
c. Does your analysis support the purchase of the new equipment?
SelectYesNoItem 6
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