Goldsmith labs recover gold from printed circuit boards. It has developed new equipment for the purpose. The following data is given.
(1)) Equipment costs $250,000
(2)) It will cost $200,000 per year to run
(3)) It has an economic life of 5 years and is depreciated using straight-line method
(4)) It will recover 300 ounces of gold per year
(5)) The current price of gold is $600 per ounce and it expected to increase at a rate 4% per year for the foreseeable future
(6)) The tax rate is 30%
(7)) The cost of capital is 8% What is NPV of the equipment?

Question

Quizplus · Accepted Answer

The NPV of the equipment is $430,400. This is calculated by taking the present value of the cash flows over the life of the equipment and subtracting the initial investment. The cash flows are calculated by taking the revenue from the sale of the gold minus the operating costs and depreciation. The revenue is calculated by multiplying the number of ounces of gold recovered by the price of gold. The operating costs are given as $200,000 per year. The depreciation is calculated by dividing the initial investment by the economic life of the equipment. The initial investment is $250,000 and the economic life is 5 years. The present value of the cash flows is calculated using the cost of capital of 8%.

Goldsmith Labs Recover Gold from Printed Circuit Boards