Metro Industries is considering the purchase of new equipment costing $1,220,000

Question

Metro Industries is considering the purchase of new equipment costing $1,220,000 to replace existing equipment that will be sold for $188,000. The new equipment is expected to have a $242,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 34,000 units annually at a sales price of $28 per unit. Those units will have a variable cost of $13 per unit. The company will also incur an additional $89,000 in annual fixed costs.

Identify the amount and timing of all cash flows related to the acquisition of the new equipment. (Enter negative amounts using a negative sign preceding the number e.g. -45.)

Cash Flow Timing Amount Purchase of new equipment Salvage of old equipment Sales revenue Variable costs Additional fixed costs Salvage of new equipment

Explanation / Answer

Cash flow Timing Amount Purchase of New Equipment      (1,220,000) 1          (1,220,000) Salvage of old equipment            188,000 1                188,000 Sales revenue            952,000 1-4 years            3,808,000 variable Costs            442,000 1-4 years            1,768,000 Additional fixed cost              89,000 1-4 years                356,000 Salvage of new equipment            242,000 at the end of 4 year                242,000

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