Problem 11-110 [LO 11-3] Grady Corp. is considering the purchase of a new piece
ID: 2572729 • Letter: P
Question
Problem 11-110 [LO 11-3]
Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $50,000, and will have a salvage value of $5,000 after six years. Using the new piece of equipment will increase Grady’s annual cash flows by $6,180. Grady has a hurdle rate of 10%. (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.)
a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.)
b. What is the present value of the salvage value? (Round your answer to 2 decimal places.)
c. What is the net present value of the equipment purchase? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.)
d. Based on financial factors, should Grady purchase the equipment? Yes No
Explanation / Answer
a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.
Present value = 6180*4.35526 = 26915.51
b) What is the present value of the salvage value? (Round your answer to 2 decimal places.)
Present value of salvage = 5000*.56447 = 2822.35
c. What is the net present value of the equipment purchase? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.)
Net present value = Present value of cash inflow-present value of cash outflow
= (26915.51+2822.35)-50000
Net present value = -20262.14
d. Based on financial factors, should Grady purchase the equipment? Yes No
No Grady should not purchase the equipment