My neighbor, Mrs. Dubois, is the accountant for the cranberry processing plant. The plant has a piece of equipment, nicknamed Harvey that is used to clean and prepare the harvested cranberries. Mrs. Dubois needs to determine if Harvey should be replaced with a newer, better version. Using the NPV tool, we will provide her a recommendation. Facts provided: 1. Old Cranberry Cleaner (Nickname: Harvey) Cost $260,000 2. Harvey’s Accumulated Depreciation $150,000 3. Cash Sales Price for Harvey $60,000 4. New
My neighbor, Mrs. Dubois, is the accountant for the cranberry processing plant. The plant has a piece of equipment, nicknamed Harvey that is used to clean and prepare the harvested cranberries. Mrs. Dubois needs to determine if Harvey should be replaced with a newer, better version. Using the NPV tool, we will provide her a recommendation.
Facts provided:
|
1. |
Old Cranberry Cleaner (Nickname: Harvey) Cost |
$260,000 |
|
2. |
Harvey’s Accumulated |
$150,000 |
|
3. |
Cash Sales Price for Harvey |
$60,000 |
|
4. |
New Equipment Cost |
$448,000 |
|
5. |
New Equipment Depreciation (Each Year) |
$44,800 |
|
6. |
New Equipment Net Cash Revenues (Each Year) |
$482,000 |
|
7. |
New Equipment Net Cash Expenses (Each Year) |
$365,000 |
|
8. |
New Equipment Estimated Useful Life |
10 Years |
|
9. |
Tax Rate |
40% |
|
10. |
Cost of Capital |
10% |
Step 1 A: Identify both the timing and amount of
(A) Compute the inflows & outflows for any assets that will be sold.
(B) Compute the inflows & outflows the assets that are being considered.
Step 2: Compute the present value of future cash flows, using the company’s cost of capital as the interest rate.
Step 3: Compute the
Step 4: Accept or reject based on Step #3
- NPV > 0: Accept the Investment
- NPV < 0: Reject the Investment
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