Newport Corp. is considering the purchase of a new piece of equipment. The cost
ID: 2559714 • 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 $200,000. The equipment will have an initial cost of $825,000 and have a 6 year life. There is no salvage value for the equipment. If the hurdle rate is 11%, 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.)
$846,100
$275,000
$21,100
$825,000
Explanation / Answer
Present Value factor
= 1 / (1 + r) ^ n
Where,
r = Rate of interest = 11% or 0.11
n = Years 1 to 6
So, PV Factor for year 2
= 1 / (1.11 ^ 2)
= 1 / 1.2321
= 0.811622
Similarly, other calculations are shown in the following table
So, the net present value is $21,100 and option C is the correct option
Calculations Years 0 1 2 3 4 5 6 A Cash flows (825,000) 200,000 200,000 200,000 200,000 200,000 200,000 B PV Factor 1.000000 0.900901 0.811622 0.731191 0.658731 0.593451 0.534641 C = A x B Present Value (825,000) 180,180 162,324 146,238 131,746 118,690 106,928 D = Sum C Net Present Value 21,100