Biology Forums - Study Force

Anderson Equipment Manufacturing produces equipment for the natural gas industry. The company management is considering purchasing new controllers for the fabricating machines. The new controllers are expected to increase efficiency and product quality. The engineering staff estimate that annual net cash savings from increased efficiency will be $35,000 per year for four years. The existing controllers can be sold for $8,000. The new controllers have a purchase price of $75,000 and will require installation costs in the amount of $4,500. The annual software contract for the new controllers is $1,700; the controllers will be depreciated using the straight-line method. The salvage value of the new controllers at the end of four years is estimated to be $10,000. The company has a required rate of return of 15%.

Required:
a.   Determine the net present value of the investment in the new controllers.
b.   Calculate the internal rate of return of the investment in the new controllers.

CF0 = $8,000 - $75,000 - $4,500 = - $ 71,500
CF1-3 = $35,000 - $1,700 = $ 33,300
CF4 = $33,300 + $10,000 = $ 43,300

a.   NPV calculator = $ 29,288.31
b.   IRR calculator = 33.3%

I see. Hmm...

Thanks for confirming, will mark this solved.