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B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $371,200 with a 7-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 148,480 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
| Sales | $ | 232,000 | |
| Costs | |||
| Materials, labor, and overhead (except depreciation) | 81,000 | ||
| Depreciation on new equipment | 53,029 | ||
| Selling and administrative expenses | 23,200 | ||
| Total costs and expenses | 157,229 | ||
| Pretax income | 74,771 | ||
| Income taxes (30%) | 22,431 | ||
| Net income | $ | 52,340 | |
| Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.) |
Expert Answer
Present value of cash flow for each year from 1 to 7 is =net income+depreciation
=52340+53029=105369
The present value of annuity factor for i=8% and n=7 is 5.2064
present value of cash inflows=5.2064*105369=548593.2
Cash outflow=371200
NPV=-371200+548593.2=177393
