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? (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

To calculate the net present value, we need to find the present value of the cost savings and subtract the initial cost of the equipment. 
The present value of the cost savings can be found using the formula: 
PV = CF / (1+r)^n, 
where CF is the cash flow ($50,000), r is the hurdle rate (10%), and n is the number of years (8). 
Using this formula, we find that the present value of the cost savings is: 
PV = $50,000 / (1+0.1)^1 + $50,000 / (1+0.1)^2 + ... + $50,000 / (1+0.1)^8 
PV = $260,363.60

To find the net present value, we subtract the initial cost of the equipment ($600,000) from the present value of the cost savings ($260,363.60) and add the salvage value of the equipment ($100,000): 
NPV = PV of cost savings - Initial cost + Salvage value 
NPV = $260,363.60 - $600,000 + $100,000 
NPV = -$239,636.40 
Therefore, the net present value is approximately -$239,636, which is less than zero. Thus, the best choice is A, as the project should not be undertaken as it would result in a negative net present value.