Exercise 9-7

• Metro Industries is considering the purchase of new equipment costing $624,000 to replace existing equipment that will be sold for $93,600. The new equipment is expected to have a $104,000 salvage value at the end of its 2-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 15,600 units annually at a sales price of $10 per unit. Those units will have a variable cost of $6 per unit. The company will also incur an additional $46,800 in annual fixed costs.
• Click here to view the factor table.
• (a)Calculate the net present value of the proposed equipment purchase. Assume that Metro uses a 6% discount rate.(For calculation purposes, use 4 decimal places as displayed in the factor table provided and round final answer to 0 decimal place, e.g. 58,971. Enter negative amount using a negative sign preceding the number for e.g. -59,992 or parentheses e.g. (59,992).)

Net present value

$

• (b)Do you recommend that Metro Industries invest in the new equipment?

NoYes