Question: The Montevideo Office Equipment Company has offered to sell some
The Montevideo Office Equipment Company has offered to sell some new packaging equipment to the Cortez Company. The list price is $65,000, but Montevideo has agreed to allow a trade-in allowance of $21,000 on some old equipment. The old equipment was carried at a book value of $21,300 and could be sold outright for $20,000 cash. Cash-operating savings are expected to be $22,000 annually for the next 8 years. The required rate of return is 14%. The old equipment has a remaining useful life of 8 years. Both the old and the new equipment will have zero disposal values 8 years from now. Should Cortez buy the new equipment? Show your computations, using the NPV method. Ignore income taxes.
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