Question: After evaluating the risk of the investment described in Exercise, K2B Co. concludes that it must earn at least a 8% return on this investment. Compute the net present value of this investment. (Round the net present value to the nearest dollar.)
Exercise: K2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment's product each year. The expected annual income related to this equipment follows. Compute the
(1) payback period and
(2) accounting rate of return for this equipment.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Costs
Materials, labor, and overhead (except depreciation) . . . . . . . . . 80,000
Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 15,000
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,500
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,500