Bramble Industries is considering the purchase of new equipment costing $1,209,0
ID: 2514137 • Letter: B
Question
Bramble Industries is considering the purchase of new equipment costing $1,209,000 to replace existing equipment that will be sold for $185,900. The new equipment is expected to have a $204,000 salvage value at the end of its 6-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 33,700 units annually at a sales price of $25 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $93,900 in annual fixed costs.
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Calculate the present value of each cash flow assuming an 7% 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 amounts using a negative sign preceding the number e.g. -58,971 or parentheses e.g. (58,971).)
Explanation / Answer
Working Notes:
Please note that the life of the asset is 6 years, present values for all the items will be calculated keeping it in mind.
1. Purchase of new equipment will take place at the price of $1,209,000. It needs to be paid instantly for buying. We need not apply the present value concept here since this is the direct outflow happening as today. We can say, present value is $1,209,000.
2. Salvage value of Old equipment as of today is $185,900. Wecan say the present value is $185,900.
3. Sales revenue will be collected over a period of 6 years. Sale revenue for an year would be 33,700*25= 842,500. This will happen for 6 years. Present value of an annuity of $1 at 7% for 6 years would be 4.7665. Present value of sales revenue for 6 years would be 842500*4.7665= $4,015,810.
4. Treament same as of sale revenuie will be applicable to Variable expenses. Present value of Variable expenses would be 33700*15*4.7665= $2,409,486.
5. Assuming fixed cost will happen at the end of year, Treament will be same as of sale revenuie . Present value of Additional fixed cost would be 93900*4.7665= $447,574.
6. Salvage of new equipment given $204,000 will be at the end ofg 6 years. Present value of salvage value at 7% discount rate would be 204,000*0.6663= $135,925.
Cash Flow Present value Category Purchase of new equipment 1,209,000 Outflow Salvage of old equipment 185,900 Inflow Sales revenue 4,015,810 Inflow Variable cost 2,409,486 Outflow Additional fixed cost 447,574 Outflow Salvage of new equipment 135,925 Inflow