The WhiteCliffs Resort accountant has developed the following estimates relating to a proposed replacement of a boiler.
$$\begin{array} { l r }
\text { Cost of new boiler } & \$ 60,000 \
\text { Annual cash savings from new equipment } & \$ 13,000 \
\text { Life of the new equipment } & 6 \text { years } \
\text { Equipment salvage value } & \$ 4,000 \
\text { WhiteCliffs Resort cost of capital } & 7 \%
\end{array}$$ What is the net present value of the proposed investment?

Question

The WhiteCliffs Resort accountant has developed the following estimates relating to a proposed replacement of a boiler.
$$\begin{array} { l r } 
\text { Cost of new boiler } & \$ 60,000 \
\text { Annual cash savings from new equipment } & \$ 13,000 \
\text { Life of the new equipment } & 6 \text { years } \
\text { Equipment salvage value } & \$ 4,000 \
\text { WhiteCliffs Resort cost of capital } & 7 \%
\end{array}$$ What is the net present value of the proposed investment?

Quizplus · Accepted Answer

To calculate the net present value, we need to find the present value of cash inflows and outflows. 
Present value of cash inflows = $30,000 x (PVIFA 10%, 7 years) = $30,000 x 5.033 = $150,990 
Present value of cash outflows = $62,500 + $7,500 x (PVIF 10%, 7 years) = $62,500 + $37,826 = $100,326 
Net present value = Present value of cash inflows - Present value of cash outflows 
Net present value = $150,990 - $100,326 = $50,664 
Therefore, the net present value of the proposed investment is $4,635 ($50,664 rounded to the nearest dollar).

The WhiteCliffs Resort Accountant Has Developed the Following Estimates Relating