Question

Grady Corp. is considering the purchase of a new piece of equipment. The equipment costs $51,500, and will have a salvage value of $5,040 after six years. Using the new piece of equipment will increase Grady’s annual cash flows by $6,190. Grady has a hurdle rate of 12%. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor from the PV tables.) a. What is the present value of the increase in annual cash flows? (Round your answer to 2 decimal places.) b. What is the present value of the salvage value? (Round your answer to 2 decimal places.) c. What is the net present value of the equipment purchase? (Negative value should be indicated by a minus sign. Round your intermediate calculation and final answer to 2 decimal places.) d. Based on financial factors, should Grady purchase the equipment? Yes No

Answer 1

a) Present value of the increase in annual cash flow = $25,449.57

b) Present value of salvage = $2,553.41

c) Net present value of equipment purchased = -$23,497.02

d) Item should not be purchased.

Step-by-step explanation:

As per the data given in the question,

a) Present value of the increase in annual cash flow = $6,190 × 4.1114

= $25,449.57

b) Present value of salvage = $5,040 × 0.50663

= $2,553.41

c) Net present value of equipment purchased = Cash inflow - initial investment

= ($25,449.57 + $2,553.41) - $51,500

= -$23,497.02

d) Since Net present value of equipment is negative therefore this equipment should not be purchased.