Lorenzo Company is considering the purchase of equipment with an eight year life that requires a $1,600,000 investment. At the end of eight years, the equipment will have no salvage value. For eight years, the equipment will provide net income at the end of each year as follows: Sales 3,000,000

Less: Variable Expenses 1,800,000

Contribution margin- 1,200,000

Less: Fixed Expenses:

Advertising- 700,000

Depreciation on equipment- 200,000

Net income- 300,000 Other information follows: Required rate of return- 18%

Tax rate 30%

Depreciation method for tax purposes- Straight Line

Present value of ordinary annuity of one at 18% for 8 periods - 4.0776

Present value of one at 18% for 8 periods- 0.266

1. Compute the after tax annual cash flows generated by the equipment.

2. Compute the equipment's net present value.

3. If the salvage value of the equipment is $10,000, compute the equipment's net present value.