Net Present Value Method

Full Service Station is planning to invest in automatic car wash equipment valued at $210,000. The owner estimates that the equipment will increase annualnet cash inflowsby $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.

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Using the net present value method, prepare an analysis to determine whether the company should purchase the equipment. UseTable 1andTable 2.

Full Service Station
Computation of NPV
Year	Net Cash Inflows	14%Factor	Present Value
1?10	$		$
Residual value
Total present value of cash inflows	$
Purchase price of equipment
Net present value	$

Determine whether the company should purchase the equipment. SelectYesNoCorrect 1 of Item 2

How important is the estimate of residual value to this decision?

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