Use the chart to answer questions 4a–4c:

a. Set up the schedule of relevant cash flows. Remember: Relevant items are those that differ between alternatives and occur in the future. Calculate the NPV in the last column.

b. Calculate the payback period.

c. Should the company buy the equipment based on the quantitative analysis?

Acquisition cost Useful life Additional major improvement in 3 years Salvage value at end of 6 years Annual cost savings Cost of capital is 10%. Years 1, 2 Years 3, 4 Years 5, 6 $200,000 6 years $16,000 $20,000 $60,000 $50,000 $45,000