Question

Connor Company is considering the purchase of new equipment for $85,000. The expected life of the equipment is 5 years with no residual value. The equipment is expected to earn revenues of $96,000 per year. Total expenses, including depreciation, are expected to be $85,000 per year. Connor management has set a minimum acceptable rate of return of 15%. Assume straight-line depreciation. a. Determine the equal annual net cash flows from operating the equipment. Round to the nearest dollar. $

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.352	2.991
6	4.917	4.355	4.111	3.784	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

b. Calculate the net present value of the new equipment using the present value of an annuity of $1 table above. Round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Annual net cash flow $ Present value of equipment cash flows $ Less equipment costs $ Net present value of equipment $ c. Does your analysis support the purchase of the new equipment? Yes

Answer 1

Answer- a)- The equal annual net cash flows from operating the equipment =$28000.

Explanation- Equal annual net cash flows= (Net revenues-Total expenses, including depreciation)+ Annual depreciation

= ($96000-$85000)+$17000

= $28000

Straight line Method:-Annual depreciation

= Cost of asset- Salvage value of asset/No. of useful life (years)

=($85000-Nil)/5 years

=$17000

b)- Net present value of the new equipment = $8856

Explanation- Net present value = Present value of cash inflows- Total outflows

= ($28000*3.352)-$85000

= $93856-$85000

= $8856

c)- Yes, Connor company should purchase the equipment due to positive net present value.