Question

Note: For all problems, round percentages to 2 decimal places and currency to the nearest dollar.

PLEASE SHOW ALL STEPS AND HOW YOU OBTAIN THE NUMBERS FOR THE NET PRESENT VALUE FOR EACH PIECE OF EQUIPMENT TO BE PURCHASED. Seeing the calculations will help me have a better understanding. I did not understand this portion of the problem when I first submitted it, so I would appreciate your showing detailed steps on how to solve this portion of this problem. I need this informaton so I can be prepared to complete my pre-exam final. Thank you for your help.

Waters Company is trying to decide which of the two new product lines to introduce in the coming year. The company requires a 10% return on investment. The predicted revenue and cost data for each product line follows:

	Product A	Product B
Unit Sales	25,000	20,000
Unit Sales Price	$   35	$   35
Direct materials	$    45,000	$       28,000
Direct labor	$ 125,000	$       85,000
Other Cash operating expenses	$    40,000	$       30,000
New equipment costs	$ 2,300,000	$ 1,800,000
Estimated useful life (no salvage)	5 years	5 years
Straight-line depreciation	(2,300,000 – 0)/5 = 460,000	(1,800,000 – 0)/5 =360,000

The company has a 30% tax rate and it used the straight-line depreciation method with no salvage value. The present value of an annuity of $1 for 5 years at 10% is 3.7908.

e. Calculate the net present value for each piece of equipment to be purchased.

                                    Problem A                Problem B

Answer 1

Calculation of expected net cash flow
Particulars			Product A	Product B
Total sale (A)			875000	700000
less: expenses
Direct material			45000	28000
Direct labor			125000	85000
Operating expenses			40000	30000
Depreciation			460000	360000
Total expenses (B)			670000	503000
Net income before Tax (A)-(B)			205000	197000
Less: tax @ 30%			61500	59100
Net income after tax			143500	137900
add: Depreciation			460000	360000
Expected cash flow			603500	497900
Total sale = sale unit*selling price p.u
Total sale (25000*35),(20000*35)			875000	700000
Calculation of Net Present value
PRODUCT A
Net present value = total present value of expected cash flow-initial investment
Total present value of expected cash flow = expected cash flow*present value annuity of 10%
total present value of expected cash flow = 603500*3.7908 = 2287748
Net present value= 2287748-2300000
Net present value Of product A = -12252.2
PRODUCT B NET PRESENT VALUE
Net present value = total present value of expected cash flow-initial investment
Total present value of expected cash flow = 497900*3.7908
Total present value of expected cash flow = 1887439
NET PRESENT VALUE OF PRODUCT B = 1887439-1800000
NET PRESENT VALUE OF PRODUCT B = 87439.32