Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $200,000. The equipment will have an initial cost of $900,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows at the hurdle rate and subtracting the initial investment. The NPV is approximately $24,580, calculated as follows: NPV = ($200,000 * (1 - (1 + 0.08)^-6) / 0.08) - $900,000.