122. A company is considering the purchase of new equipment for $45,000. The projected after-tax net income is $3,000 after deducting $15,000 of depreciation. The machine has a useful life of three years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows:
Period
|
Present Value of an
Annuity of 1 at 12%
|
1
|
0.8929
|
2
|
1.6901
|
3
|
2.4018
|
What is the net present value of this machine, assuming all cash flows occur at year-end?
123. A company is considering the purchase of new equipment for $39,000. The projected after-tax net income is $6,000 after deducting $13,000 of depreciation. The machine has a useful life of three years and no salvage value. Management of the company requires a 12% return on investment. The present value of an annuity of 1 for various periods follows:
Period
|
Present Value of an
Annuity of 1 at 12%
|
1
|
0.8929
|
2
|
1.6901
|
3
|
2.4018
|
Required:
a. What is the net present value of this machine assuming all cash flows occur at year-end?
b. What is the profitability index for this equipment?
124. A company is trying to decide which of two new product lines to introduce in the coming year. The company requires a 12% return on investment. The predicted revenue and cost data for each product line follows:
|
Product A
|
Product B
|
Unit sales
|
25,000
|
20,000
|
Unit sales price
|
$ 30
|
$ 30
|
|
|
|
Direct materials
|
$ 15,000
|
$ 8,000
|
Direct labor
|
$ 120,000
|
$ 80,000
|
Other cash operating expenses
|
$ 30,000
|
$ 25,000
|
|
|
|
New equipment costs
|
$2,500,000
|
$1,500,000
|
Estimated useful life (no salvage)
|
5 years
|
5 years
|
The company has a 30% tax rate and it uses the straight-line depreciation method. The present value of an annuity of 1 for 5 years at 12% is 3.6048. Compute the net present value for each piece of equipment under each of the two product lines. Which, if either, of these two investments is acceptable?