Grant Inc. would like to replace an outdated piece of equipment with a newer model. Grant has determined that the new equipment needs to generate annual cash inflows of $10,000 for six years and have a salvage value at the end of year six of $4,000. Grant uses a cost of capital equal to 15 percent when making capital investment decisions. Given this information, which of the following statements is true regarding the cost of the new equipment if, using net present value analysis, Grant decides to purchase the new equipment because it has a positive net present value?

Question

Quizplus · Accepted Answer

The net present value (NPV) analysis involves calculating the present value of future cash inflows and comparing it to the cost of the investment. The present value of $10,000 annual cash inflows for six years at a 15% discount rate, plus the present value of the $4,000 salvage value, should be greater than the cost of the equipment for the NPV to be positive. The calculation shows that the cost must be $39,574 or less for the NPV to be positive.

Grant Inc Would Like to Replace an Outdated Piece of Equipment