Exercise 97 Sarasota Industries is considering the purchase

Exercise 9-7 Sarasota Industries is considering the purchase of new equipment costing $324,000 to replace existing equipment that will be sold for $48,600. The new equipment is expected to have a $54,000 salvage value at the end of its 1-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 8,100 units annually at a sales price of $5 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $24,300 in annual fixed costs. Click here to view the factor table (a) Calculate the net present value of the proposed equipment purchase. Assume that Sarasota uses a 4% 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 amount using a negative sign preceding the number e.g. -59,992 or parentheses e.g. (59,992).) Net present value (b) Do you recommend that Sarasota Industries invest in the new equipment?

Solution

PVIF @ 4% after 1 year = 0.9615

Cash Inflow :-

Sold existing equipment

48600

PV of Sell additional units (8100 units * [5 – 3]) * 0.9615

15576

PV of salvage of new equipment (54000 * 0.9615)

51921

116097

Cash Outflow:-

Purchase new Equipment

324000

Additional Fixed cost

24300

(348300)

NPV

(232206)

(b) No there is no need to invest in new equipment due to negative NPV

Cash Inflow :-
Sold existing equipment	48600
PV of Sell additional units (8100 units * [5 – 3]) * 0.9615	15576
PV of salvage of new equipment (54000 * 0.9615)	51921	116097
Cash Outflow:-
Purchase new Equipment	324000
Additional Fixed cost	24300	(348300)
NPV		(232206)