Byron 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 $100,000.The equipment will have an initial cost of $400,000 and have a 5-year life.The salvage value of the equipment is estimated to be $75,000.If the hurdle rate is 15%,what is the approximate net present value? Ignore income taxes.(Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuity of $1. )(Use appropriate factor from the PV tables.Round your final answer to the nearest dollar amount. )

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. Here, the annual cash flow is $100,000 for 5 years, and the salvage value is $75,000. Using the Present Value Annuity of $1 table for 5 years at 15%, the factor is approximately 3.3522. So, the present value of the cash flows is $100,000 * 3.3522 = $335,220. The present value of the salvage value, using the Present Value of $1 for 5 years at 15%, is approximately 0.4972. So, the present value of the salvage value is $75,000 * 0.4972 = $37,290. Adding these two gives $335,220 + $37,290 = $372,510. Subtracting the initial investment of $400,000 results in an NPV of approximately -$27,490.