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Wilson Corp. is considering the purchase of a new piece of equipment. The cost savings from...

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Wilson Corp. is considering the purchase of a new piece ofequipment. The cost savings from the equipment would result in anannual increase in net income after tax of $50,000. The equipmentwill have an initial cost of $626,000 and have an 8 year life. Thesalvage value of the equipment is estimated to be $114,000. If thehurdle rate is 11%, what is the approximate net present value?

can you please explain everything step by step as to how you getthe answer including the present value factor.

Answer & Explanation Solved by verified expert
4.2 Ratings (541 Votes)

Annual Depreciation =[cost-salvage value ]/useful life

           =[626000-114000]/8

            = 512000/8

            = 64000

Annual cash flow =Net income +depreciation

         = 50000+64000

         = 114000

Present value of cash flow =[PVA11%,8*Annual cash flow ]+[PVF11%,8*Salvage value]

   =[5.14312*114000]+[.43393*114000]

   = 586315.68+ 49468.02

= $ 635783.70

NPV =Present value of cash flow -Initial cost

      = 635783.70-626000

      = 9783.70

**Find present value factor using the formula 1/(1+i)^n or using financial calculator where i=11%,n=8 ,FV=1

**Find present value annuity factor using the formula [1/(1+i)^1+1/(1+i)^2+ 1/(1+i)^3+........1/(1+i)8] or using financial calculator where i = 11% n= 8 ,PMT = 1
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Transcribed Image Text

Wilson Corp. is considering the purchase of a new piece ofequipment. The cost savings from the equipment would result in anannual increase in net income after tax of $50,000. The equipmentwill have an initial cost of $626,000 and have an 8 year life. Thesalvage value of the equipment is estimated to be $114,000. If thehurdle rate is 11%, what is the approximate net present value?can you please explain everything step by step as to how you getthe answer including the present value factor.

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