Wilson Corp is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $50,000.The equipment will have an initial cost of $600,000 and have an 8 year life.The salvage value of the equipment is estimated to be $100,000.If the hurdle rate is 10%,what is the approximate net present value?

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV), we need to discount the cash inflows and outflows to their present values based on the hurdle rate of 10%.

The initial cost of the equipment is -$600,000 (cash outflow). The annual savings of $50,000 is an annuity for 8 years, discounted to its present value at 10%, which equals to $285,174. The salvage value of $100,000 is a cash inflow at the end of 8 years, discounted to its present value at 10%, which equals to $60,348.

So, the total present value of the cash inflows is $345,522 (285,174 + 60,348) and the total present value of the cash outflows is $600,000. Therefore, the net present value is -$254,478, which is less than zero. This means the project is not profitable and should be rejected.

Wilson Corp Is Considering the Purchase of a New Piece