Answered Essay: B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expect

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $371,200 with a 7-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 148,480 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

 

  Sales $ 232,000
  Costs
     Materials, labor, and overhead (except depreciation) 81,000
     Depreciation on new equipment 53,029
     Selling and administrative expenses 23,200
  Total costs and expenses 157,229
  Pretax income 74,771
  Income taxes (30%) 22,431
  Net income $ 52,340

 

Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)

Expert Answer

 

Present value of cash flow for each year from 1 to 7 is =net income+depreciation
=52340+53029=105369
The present value of annuity factor for i=8% and n=7 is 5.2064
present value of cash inflows=5.2064*105369=548593.2
Cash outflow=371200
NPV=-371200+548593.2=177393

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