THE SIMED COMPANY

The Simed company is considering the purchase of new equipment that must perform activities that are currently done manually. The purchase price is $ 20,000, delivery and installation included.

According to the accountant's calculations, the new equipment would generate annual savings in labor and other expenses of around $ 4,800 per year compared to the current situation. The expected economic life of the new equipment is 4 years, with a salvage value of $ 2,000 at the end of the project.

The cost of capital is 10% for this project to take into account the high interest rates in the current market as well as the return expected by investors on their shares.

Questions :

1. Calculate the value of cash inflows for the project period.

2. Calculate the Net Present Value (NPV) of this project. According to your calculations, should the company purchase the equipment in question?

3. If the capital rate was 2% instead of 10%, should the company buy the equipment in question?

4. If the new equipment provides annual savings of $ 6,000 instead, and if the other conditions are such that the company should purchase the equipment in question?