Question
Surf Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in
Surf Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $50,000. The equipment will have an initial cost of $600,000 and have an 8-year life. The equipment has no salvage value. The hurdle rate is 10%. Ignore income taxes. Answer the following:
10% PV of annuity factor: 5.3349
15% PV of annuity factor: 4.4873
a. What is the accounting rate of return? b. What is the payback period? c. What is the net present value? d. What would the net present value be with a 15% hurdle rate? e. Based on the NPV calculations, in what range would the equipment's internal rate of return fall?
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