ABC Company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years: 
Year 1, ....... $15,000
Year 2, ........$13,000
Year 3 ........$10,000
Year 4, .......$10,000
Year 5, ....... $6,000
ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.
a. What is the net present value of the proposed investment ignore income taxes and depreciation?
b. Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?
c. Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not? 

  • CreatedJuly 29, 2013
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