ACC 206

Potential investments to accelerate profit: ABC company has the option to purchase additional equipment that will cost about $42,000, and this new equipment will produce the following savings in factory overhead costs over the next five years:

Year 1, $15,000

Year 2, $13,000

Year 3, $10,000

Year 4, $10,000

Year 5, $6,000

ABC Company uses the net-present-value method to analyze investments and desires a minimum rate of return of 12% on the equipment.

a.       What is the net present value of the proposed investment ignore income taxes and depreciation? 

b.      Assuming a 5-year straight-line depreciation, how will this impact the factory’s fixed costs for each of the 5 years (and the implied product costs)? What about cash flow?

Considering the cash flow impact of the equipment as well as the time-value of money, would you recommend that ABC Company purchases the equipment? Why or why not?