Sipton Tea is considering the purchase of equipment for an additional processing line. The equipment will increase revenues by $20 000 per year, but additional cash operating expenses would be $5000 per year. The equipment would cost $40 000 and have a 10-year life, with no residual value projected.
Required:
(1) If Sipton's cost of capital is 12%, calculate the net present value of the investment.
(2) Should the proposal be accepted or rejected at a cost of capital of 12%? Why?

Question

Quizplus · Accepted Answer

The Answer of Sipton Tea is considering the purchase of equipment for an additional processing line. The equipment will increase revenues by $20 000 per year, but additional cash operating expenses would be $5000 per year. The equipment would cost $40 000 and have a 10-year life, with no residual value projected.
Required:
(1) If Sipton's cost of capital is 12%, calculate the net present value of the investment.
(2) Should the proposal be accepted or rejected at a cost of capital of 12%? Why?

Sipton Tea Is Considering the Purchase of Equipment for an Additional