Newport Corp. is considering the purchase of a new piece of equipment. The cost
ID: 2535691 • 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 $220,000. The equipment will have an initial cost of $920,000 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.)
$306,667
$920,000
$958,166
$38,166
Explanation / Answer
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$220,000[1-(1.1)^-6]/0.1
=$220,000*4.3553
=$958,166
NPV=Present value of inflows-Present value of outflows
=$958,166-$920,000
which is equal to
=$38166.