Net Present Value Method
Response to the following problem:
A fast-food establishment is thinking of buying a new cooking grill and refrigeration unit. The costs of these new machines are $12,500 and $9,000, respectively. The installation costs of the new equipment will run about $800. It is estimated that 10% more customers can be served with the new equipment, which would mean an additional annual net cash flow of approximately $4,500. The salvage value of the old grill and refrigeration unit is estimated to be $1,000.
The firm's cost of capital is 12%. The equipment should last 10 years, at a minimum.
Required:
Using the net present value method, should the company purchase the new equipment? (Ignore income tax effects.)