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A business is considering investing in a new piece of equipment. Information about the Equipment: Life of equipment: 10 years Cost of equipment: $600,000 Equipment

A business is considering investing in a new piece of equipment. Information about the Equipment:

Life of equipment: 10 years

Cost of equipment: $600,000

Equipment salvage value (in 10 years): $ 10,000

The equipment will require major repairs in year 8 at a cost of $40,000. Cost of capital of 10%.

Information about the annual financial effect of the new equipment over the ten years:

Annual Income (all sales are cash sales): $130,000

Expenses: Annual expenses (paid by cash): $ 30,000

Other annual expenses (depreciation): $ 59,000 89,000

Annual increase in net income: $ 41,000

REQUIRED:

  1. Calculate the payback period
  2. Calculate net present value
  3. Identify and briefly discuss other factors to be considered.

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