Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality

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Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $960,000, with an estimated eight-year life and no salvage value. The estimated annual operating results with the new equipment are as follows.
Revenue from sales of new luggage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $660,000
Expenses other than depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000 .................
Depreciation (straight-line basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 . . . . . 360,000
Increase in net income from the new line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following for the investment in the new equipment to produce the new luggage line.
a. Annual cash flows.
b. Payback period.
c. Return on average investment.
d. Total present value of the expected future annual cash inflows, discounted at an annual rate of 20 percent.
e. Net present value of the proposed investment discounted at 20 percent?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Financial and Managerial Accounting the basis for business decisions

ISBN: 978-1259692406

18th edition

Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello

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