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Connor Company is considering purchasing new equipment for $180,000. The expected life of the...

Question:

Connor Company is considering purchasing new equipment for $180,000. The expected life of the equipment is 6 years with no residual value. The equipment is expected to generate revenues of $185,000 per year. Total expenses, including depreciation (calculated using the straight-line method), are expected to be $150,000 per year. Connor management has set a minimum acceptable rate of return of 15%.

Required:

1. Determine the equal annual net cash flows from operating the equipment.

2. Calculate the net present value of the new equipment.

3. Which of the following statements is correct regarding the purchase of the new equipment?

a. The analyses support the purchase of the new equipment, because the present value of the equipment's net cash flows exceeds its cost.

b. The analyses support the purchase of the new equipment, because the present value of the equipment's net cash flows is less than is cost.

c. The analyses support the purchase of the new equipment, because the present value of the equipment's net cash flows is equal to its cost.

d. The analyses do not support the purchase of the new equipment, because the net present value is negative.

Present Value:

"Present value" also known as discounted value, is a financial calculation that measures the worth of a future amount of money or stream of payments in today's dollars adjusted for interest and inflation.

Answer and Explanation: 1

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1. Determine the equal annual net cash flows from operating the equipment.

Cash flows from operating the equipment = Revenue( Income) + Depreciation

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How to Calculate the Present Value of an Annuity

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Chapter 8 / Lesson 3
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Learn how to find present value of annuity using the formula and see its derivation. Study its examples and see a difference between Ordinary Annuity and Annuity Due.


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