The Manager of a Webster Manufacturing Company is considering the purchase of a new piece of manufacturing
Question:
The Manager of a Webster Manufacturing Company is considering the purchase of a new piece of manufacturing equipment, which will expand the company’s product line. The equipment has a cost of $150,000 and has no anticipated salvage value at the end of its useful life of four years. Based on anticipated sales, profits from the use of the equipment are estimated to be:
Year 1 ........$40,000
Year 2 ........ 50,000
Year 3 ........ 60,000
Year 4 ........ 70,000
The cost of capital to the company has been calculated at 8%. Provide the Manager with
(a) The Payback Period,
(b) The Net Present Value, associated with the potential purchasea.
Explain the results of your financial analysis and the importance of this process.
Net Present ValueWhat is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
a Computation of the Pay Back period Years Cash flows Cummulative cash flows 1 40000 40000 2 5...View the full answer
Accounting concepts and applications
ISBN: 978-0538745482
11th Edition
Authors: Albrecht Stice, Stice Swain
