| BioFarm Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $124,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $41,000. The new equipment can be bought for $173,140, including installation. Over its 10-year life, it will reduce operating expenses from $193,100 to $145,400 for the first six years, and from $203,100 to $192,600 for the last four years. Net working capital requirements will also increase by $20,500 at the time of replacement. It is estimated that the company can sell the new equipment for $24,500 at the end of its life. Since the new equipments cash flows are relatively certain, the projects cost of capital is set at 10%, compared with 15% for an average-risk project. The firms maximum acceptable payback period is 5 years. Click here to view PV table. |
