Straightforward net present value calculations
Contempo Inc. is considering the acquisition of some new labor-saving equipment. Management estimates that the equipment will cost $42,000 and will produce the following savings in cash operating costs during the next 5 years:
Year 1, $18,000;
Year 2, $13,000;
Year 3, $10,000;
Year 4, $10,000; and
Year 5, $6,000.
The company uses the net present value method to analyze investments and desires a minimum rate of return of 12%.
a. Compute the net present value of the proposed investment. Ignore income taxes and round to the nearest dollar.
b. Considering the time value of money , should Contempo acquire the new equipment? Why?