Newport Corp. is considering the purchase of a new piece of equipment. The cost
ID: 2536587 • 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 $202,000. The equipment will have an initial cost of $850,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 9%, 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.)
a $906,152
b $850,000
c $56,152
d $283,333
Explanation / Answer
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
$202000[1-(1.09)^-6]/0.09
=$202000*4.4859
=$906152(Approx)
NPV=Present value of inflows-Present value of outflows
=(906152-850000)
$56152.