B2B Co is considering the purchase of equipment that would a

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $379,200 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 151,680 units of the equipment\'s product each year. The expected annual income related to this equipment follows Sales Costs $. 237,000 Materials, labor, and overhead (except depreciation on new equipment) 83,000 63,200 23,700 169,900 67,100 13,420 $ 53,680 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (20%) Net income If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1. FV of $1, PVA Of $1, and FVA of $1 (Use appropriate factor(s) from the tables provided.) Chart Values are Based on: n= Select Chart Amount X PV FactorPresent Value Net present value

Solution

n = 6

i = 9%

Net income = $53,680

Operating cash flow = Net income + Depreciation

= $53,680 + 63,200

= $1,16,880

Net present value = Present value of cash inflows - Present value of cash outflows

= Operating cash inflow * PVF@9%,6years - $3,79,200

= $1,16,880 * 4.4859 - $3,79,200

= $5,24,314 - $3,79,200

= $1,45,114

Net present value = $1,45,114