Question

Newport Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $220,000. The equipment will have an initial cost of $968,000 and have a 6-year life. There is no salvage value for the equipment. If the hurdle rate is 8%, what is the approximate net present value? Ignore income taxes. (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. Round your final answer to the nearest dollar amount.)

Answer 1

The net present value (NPV) is a financial metric used to determine the value of an investment. It takes into account the cash inflows and outflows over a specified period of time, discounted by a predetermined interest rate.

Step-by-step explanation:

The net present value (NPV) is a financial metric used to determine the value of an investment. It takes into account the cash inflows and outflows over a specified period of time, discounted by a predetermined interest rate. To calculate the NPV, the future cash flows are discounted to their present value using the appropriate discount rate.

In this case, the annual increase in cash flow from the equipment is $220,000. The equipment has an initial cost of $968,000 and a 6-year life with no salvage value. The hurdle rate, or discount rate, is 8%.

To calculate the NPV, we need to discount the annual cash flow of $220,000 over 6 years. The present value of each cash flow is calculated by dividing it by (1 + discount rate)^n, where n is the number of years. The NPV is then the sum of the present values.

Using the appropriate discount factor from the present value tables, we can calculate the present value for each year's cash flow. Adding up all the present values gives us the approximate net present value of the equipment purchase.

Answer 2

$49,060

Step-by-step explanation:

We can use the following formula, to calculate the net present value of the project:

Net Present Value

= Annual Cash inflows * Annuity Factor at 8% for 6 Years - Investment

Here

Annual Cash inflow is $220,000

r is 8%

Annuity factor = (1- (1+r)^-n) / r = (1 - (1 + 8%)^-6) / 8% = 4.623

Investment is $968,000

Net Present Value = $220,000 * 4.623 - $968,000

= $49,060