A Manufacturing Company Is Considering the Purchase of Equipment Costing

question 58

Essay

A manufacturing company is considering the purchase of equipment costing $160,000 that will provide cost savings of $60,000; $40,000; $50,000; $70,000; and $30,000 over the 5-year estimated life. The discount rate is 14%. Ignore income taxes.
a)Determine the net present value.
b)Determine the profitability index.
c)What is the highest price the company would be willing to pay for the equipment?
d)Assume the equipment costs $160,000 and that the annual cost savings are uniform (i.e., the same amount every year). What is the minimum amount of annual cost savings that would be needed to earn at least a 14% return?

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Definitions:

Systematists

Scientists who study the diversity of life and the evolutionary relationships between organisms, classifying them into a systematic framework.

Probability

A measure of the likelihood of a particular event or outcome occurring, expressed as a number between 0 and 1.

Lentivirus

Lentivirus is a genus of retroviruses associated with long incubation periods, known to infect host cells and integrate into their DNA, including human immunodeficiency virus (HIV).

Retrovirus

An RNA virus that uses reverse transcriptase to produce a DNA intermediate, known as a DNA provirus, in the host cell. See DNA provirus.