Saturday, 17 October 2015

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

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 $360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product each year. The expected annual income related to this equipment follows. If at least an 8% return on this investment must be earned, compute the net present value. (FV of $1, PV of $1, FVA of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

        
  Sales $ 225,000  
  Costs        
     Materials, labor, and overhead (except depreciation)   120,000  
     Depreciation on new equipment   30,000  
     Selling and administrative expenses   22,500  
  

 
  Total costs and expenses   172,500  
  

 
  Pretax income   52,500  
  Income taxes (30%)   15,750  
  

 
  Net income $ 36,750  
  



 



Compute the net present value of this investment.
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