Capital Investment Decision: Net Present Value Method E10A. Accounting Connection ?

Full Service Station is planning to invest in auto- matic car wash equipment valued at $210,000. The owner estimates that the equipment will increase annual net cash inflows by $40,000. The equipment is expected to have a ten- year useful life with an estimated residual value of $20,000. The company requires a 14 percent minimum rate of return. Using the net present value method, prepare an analysis to determine whether the company should purchase the equipment. How important is the estimate of residual value to this decision? (Hint: Use Tables 1 and 2 in Appendix B.)

You are to use the same format as E-10B which is provided here. Please use a Word document to complete this assignment.

Capital Investment Decision: Net Present Value MethodE10B.

H & Y Service Station is planning to invest in automatic car wash equipment valued at $240,000. The owner estimates that the equipment will increase annual net cash inflows by $46,000. The equipment is expected to have a ten-year useful life with an estimated residual value of $50,000. The company requires a 14 percent minimum rate of return. Using the net present value method, prepare an analysis to determine whether the company should purchase the equipment. How important is the estimate of residual value to this decision? (Hint: Use Tables 1 and 2 in Appendix B.)

E10B. Capital Investment Decision: Net Present Value Method

Year	Net Cash flow	x	14%	=	Present Value
1-10	$46,000		5.216 *		$239,936
Residential Value	50,000		0.270 **		13,500
Total present value of Cash Flows					253,436
Less purchase price of machine					240,000
Net present value					13,436
The project should be accepted bcoz it produces net present value.
The estimated residual value is critical to the decision because its realization in 10 years is necessary to achieve a positive net present value
* from table 2 in appendix B
* from table 1 in appendix B