Marian Company is considering the purchase of equipment for $400,000.The equipment will have a ten year life with no terminal salvage value.Straight-line depreciation will be used for tax purposes.It is expected that the equipment will generate annual sales of $200,000 for ten years and annual production costs,exclusive of depreciation,of $120,000 for ten years.The tax rate is 40%.The required rate of return is 10%.The present value of one for 10 years at 10% is 0.3855.The present value of an ordinary annuity of one for 10 years at 10% is 6.1446.What is the net present value of the equipment?

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by finding the present value of cash inflows and subtracting the initial investment. The annual cash inflow is $48,000 after tax ($80,000 profit - $32,000 tax). The present value of these inflows is $294,931. Subtracting the initial investment of $400,000 gives an NPV of $(6,746).

Marian Company Is Considering the Purchase of Equipment for $400,000