Question

Concord Industries is considering the purchase of new equipment costing $1,270,000 to replace existing equipment that will be sold for $175,000. The new equipment is expected to have a $206,000 salvage value at the end of its 4-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 31,100 units annually at a sales price of $21 per unit. Those units will have a variable cost of $15 per unit. The company will also incur an additional $80,000 in annual fixed costs. Identify the amount and timing of all cash flows related to the acquisition of the new equipment.

Answer 1

Answer and Explanation:

The identification of the amount and timing of all cash flows is shown below:

Particulars Timing Amount

Purchase of new equipment 0 $1,270,000

Salvage value of old equipment 0 $175,000

Sales revenue 1 - 4 $653,100 (31,100 units × $21)

Less - Variable cost 1- 4 -$466,500 (31,100 units × $15)

Less - Additional fixed cost 1- 4 -$80,000

Salvage of new equipment 4 $206,000

We simply identify the timing and the amount i.e displayed above