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Hello students, here is a question.
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A company is deciding whether to purchase new equipment that cost $500 ,000.
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Management estimates the life of a new asset to be 4 years and expects it to generate an additional $160 ,000, the annual profit.
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In the 5th year, the company plans to sell an equipment for a salvage value of $50 ,000.
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The opportunity cost of capital is 8%.
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Calculate pv and np.
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So, what rate will be np equal to 0? so, this is our question.
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Let us start solving the problem.
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So, our first step is calculation of npv.
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So, npv is equal to present value of cash flow minus present value of cash outflow.
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So, that is, when we deduct present value of inflow minus present value of cash flow, which gives us $500 ,000.
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This is our npv.
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Next is present value of cash flow.
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So, present value of cash flow is equal to additional profits.
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So, to calculate this additional profit, we have the steps to follow, that is, year, pv factor, present value factor, which we get from the calculation or from the table, then present value.
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So, number of years will be 5 years, 1, 2, 3, 4 and 5 years.
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Present value factors are, so before that we need to calculate inflow, pv factor...