Your company is looking to purchase a loader at a cost of $120,000. The loader would have a useful life of 5 years with a salvage value of $12,000 at the end of year five. (The salvage value is what you can sell the equipment for in year 5 and would represents a cash inflow.) The loader can be billed out at $95.00 per hour. It costs $55.00 per hour to operate.
Using 1200 billable hours per year determine the net present value for the purchase of the loader using a cost of capital (discount rate) (r) of 20 percent. Should you purchase the loader? (Ignore depreciation)
Hint: Draw your timeline, how much profit (revenue less costs which in this case will be the cash flow you will need for your time line.) will your firm realize from the loader?