B2B Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment costs $376,000 and has a 12-year life and no salvage value. B2B Company requires at least an 10% return on this investment. The expected annual income for each year from this equipment follows:
Sales of new product – $235,000
Expenses:
Materials, labor, and overhead (except depreciation) – 82,000
Depreciation-Equipment – 31,333
Selling, general, and administrative expenses – 23,500
Income – $98,167
A) Compute the net present value of this investment.
B) Should the investment be accepted or rejected on the basis of net present value?
NPV for varying costs of capital. Dane Cosmetics is evaluating a new fragrance mixing machine. The machine requires an initial investment of $24,000 and will generate after-tax cash inflows of $5,000 per year for 8 years. For each of the costs of capital listed, (1) calculate the net present value (NPV), (2) indicate whether to accept or reject the machine, and (3) explain your decision.
A) The cost of capital is 10%.
B) The cost of capital is 12%.
C) The cost of capital is 14%.
