Annuity Connor Company is considering the purchase of new equipment for $240,000. The expected life of the
Question:
Annuity Connor Company is considering the purchase of new equipment for $240,000. The expected life of the equipment is 10 years with no residual value. The equipment is expected to earn revenues of $152,000 per year. Total expenses, including depreciation, are expected to be $120,000 per year. Connor management has set a minimum acceptable rate of return of 6%. Assume straight-line depreciation.
a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar.
b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value.
Present Valu of an Annuity of $1 at Compound Interest 15% 20% 0.943 0.909 0.893 0.870 0.833 1.528 2.106 3.465 3.170 3.037 2.855 2.589 4.212 3.791 3.605 3.352 2.991 4.9174.355 4.111 3.784 3.326 5.582 4.868 4.564 4.160 3.605 3.837 4.031 7.360 6.145 5.650 5.019 4.192 10% 12% 1.833 1.736 1.690 1.626 2.673 2.487 2.402 2.283 6.210 5.335 4.9684.487 6.802 5.759 5.328 4.772 10 Annual net cash flow Present value of equipment cash flows Less equipment costs Net present value of equipment
Step by Step Answer:
Annual Cash FlowRevenueExpenses Revenue152000Depreciation1520002400001...View the full answer
Accounting Texts and Cases
ISBN: 978-1259097126
13th edition
Authors: Robert Anthony, David Hawkins, Kenneth Merchant
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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