Question 1

Ayayai Industries is considering the purchase of new equipment costing $288,000 to replace existing equipment that will be sold for $43,200. The new equipment is expected to have a $48,000 salvage value at the end of its 1-year life. During the period of its use, the equipment will allow the company to produce and sell an additional 7,200 units annually at a sales price of $5 per unit. Those units will have a variable cost of $3 per unit. The company will also incur an additional $21,600 in annual fixed costs.

Click here to view the factor table.

(a) Calculate the net present value of the proposed equipment purchase. Assume that Ayayai uses a 4% 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 e.g. -59,992 or parentheses e.g. (59,992).)

Net present value $

(b) Do you recommend that Ayayai Industries invest in the new equipment