Review the data provided in Exercise 9-1.
Metro Industries is considering the purchase of new equipment costing $1,200,000 to replace existing equipment that will be sold for $180,000. The new equipment is expected to have a $200,000 salvage value at the end of its four-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 30,000 units annually at a sales price of $20 per unit. Those units will have a variable cost of $12 per unit. The company will also incur an additional $90,000 in annual fixed costs.

a. Calculate the net present value of the proposed equipment purchase. Assume that Metro uses a 12% discount rate.
b. Do you recommend that Metro Industries invest in the new equipment? Why or why not?

  • CreatedFebruary 21, 2014
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