Metro Industries is considering the purchase of new equipment costing $336,000 t
ID: 2458657 • Letter: M
Question
Metro Industries is considering the purchase of new equipment costing $336,000 to replace existing equipment that will be sold for $50,400. The new equipment is expected to have a $56,000 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 8,400 units annually at a sales price of $6 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $25,200 in annual fixed costs.
Click here to view the factor table.
(a) Calculate the net present value of the proposed equipment purchase. Assume that Metro uses a 3% 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 for e.g. -59,991 or parentheses e.g. (59,991).)
Net present value $ ___________________
(b) Do you recommend that Metro Industries invest in the new equipment?
________
Explanation / Answer
Answer:(a)
Answer:(b) No,Metro Industries should not invest in the new equipment because NPV is negative.
Particulars Amount ($) Sales 50400 Less: Variable cost 25200 Contribution margin 25200 Fixed cost 25200 Net income 0 Particulars 0 1 Intial investment -336000 Sale value 50400 Net cost of investment -285600 Salvage value 56000 Annual cash flow 0 Net cash flow -285600 56000 P.V.F (3%) 1 0.971 PV ($) -285600 54376 NPV -231224