Newport Corp. is considering the purchase of a new piece of equipment. The cost
ID: 2438758 • Letter: N
Question
Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $204,000. The equipment will have an initial cost of $930,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables. Round your final answer to the nearest dollar amount.) Positive $310,000 Negative $41,519 Positive $41,519 Zero
Explanation / Answer
Net Present Value [NPV] of the Project = Present Value of Annual Cash inflows – Initial Investments
= [Annual Cash Inflow x Present Value Annuity Factor ] – Initial Investment
= [$204,000 x (PVIFA 10%, 6 Years)] – $930,000
= [$204,000 x 4.35529] – $930,000
= $888,481 - $930,000
= - $41,519 [Negative NPV]
Hence, The Answer is “Negative $41,519”