Braxton Manufacturing is considering the purchase of new computerized equipment.The machine costs $75,000 and would generate $22,000 in annual cost savings over its 5-year life.At the end of 5 years,the equipment would have a $5,000 salvage value.Braxton's required rate of return is 12%.The machine's net present value is

Question

Quizplus · Accepted Answer

To calculate the net present value (NPV) of the equipment, we need to discount the cost savings and salvage value back to present value and then subtract the initial cost of the equipment. Using a required rate of return of 12%, we can calculate the NPV as follows:

Year 0: 
-$75,000 (cost of equipment)

Year 1-5: 
$22,000 / (1.12)^1 = $19,643.71 
$22,000 / (1.12)^2 = $17,529.57 
$22,000 / (1.12)^3 = $15,642.49 
$22,000 / (1.12)^4 = $13,974.78 
$22,000 / (1.12)^5 = $12,510.68 
Total cost savings = $79,301.23

Salvage value at the end of Year 5:
$5,000 / (1.12)^5 = $3,224.43

NPV = -$75,000 + $79,301.23 + $3,224.43 = $7,143.66

Therefore, the best choice is C, as it has the highest net present value.

Braxton Manufacturing Is Considering the Purchase of New Computerized Equipment