A manufacturing company is considering the purchase of equipment costing $160,000 that will provide cost savings of $60,000; $40,000; $50,000; $70,000; and $30,000 over the 5-year estimated life. The discount rate is 14%. Ignore income taxes.
a)Determine the net present value.
b)Determine the profitability index.
c)What is the highest price the company would be willing to pay for the equipment?
d)Assume the equipment costs $160,000 and that the annual cost savings are uniform (i.e., the same amount every year). What is the minimum amount of annual cost savings that would be needed to earn at least a 14% return?

Question

Quizplus · Accepted Answer

The Answer of A manufacturing company is considering the purchase of equipment costing $160,000 that will provide cost savings of $60,000; $40,000; $50,000; $70,000; and $30,000 over the 5-year estimated life. The discount rate is 14%. Ignore income taxes.
a)Determine the net present value.
b)Determine the profitability index.
c)What is the highest price the company would be willing to pay for the equipment?
d)Assume the equipment costs $160,000 and that the annual cost savings are uniform (i.e., the same amount every year). What is the minimum amount of annual cost savings that would be needed to earn at least a 14% return?

A Manufacturing Company Is Considering the Purchase of Equipment Costing