Net Present Value Method-Annuity Connor Company is considering the purchase of n
ID: 2493756 • Letter: N
Question
Net Present Value Method-Annuity Connor Company is considering the purchase of new equipment for $240,000. The expected life of the equipment is 10 years with no residual value. The equipment is expected to earn revenues of $152,000 per year. Total expenses, including depreciation, are expected to be $120,000 per year. Connor management has set a minimum acceptable rate of return of 6%. Assume straight-line depreciation. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar. Present Value of an Annuity of $1 at Compound Interest Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Annual net cash flow Present value of equipment cash flows Less equipment costs Net present value of equipment.Explanation / Answer
Annual Cash Flow=Revenue-Expenses
Revenue=$152,000+Depreciation=$152,000+(240,000/10)=$152,000+24,000=176,000
Expenses=$120,000
Annual cash Flow=$176,000-$120,000=$56,000
Net Present Value of the new equipment using the present value:
Annual cash flow= $56,000
Present value of equipment cash flow=56,000*7.36=$412,160
Less:Equipment cost =$240,000
Net present value of equipment =$172,160