Newport Corp. is considering the purchase of a new piece of equipment. The cost
ID: 2584737 • 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 $209,000. 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.)
a) Zero
b) Negative $9,742
c) Positive $306,667
d) Positive $9,742
Explanation / Answer
Cost of the equipment = $920,000
Annual cash flows = $209,000
Present Value of Cash flows = 209,000 * PVAF ( 10% for 6 years)
= 209,000 * 4.3553 = 910,258
NPV = 910,258 - 920,000 = (9,742) option b