Purchase Solution

Analysis of equipment NPV and effect on cash flow

Not what you're looking for?

Ask Custom Question

My company is considering buying new equipment with a cost of $625,000 and a salvage value of $50,000 at the end of its useful life of ten years. The equipment is expected to generate additional annual cash flow for ten years with the following possibilities:

Probability Cash Flow

.15 $60,000
.25 $85,000
.45 $110,000
.15 $130,000

a. What is the expected cash flow?
b. If the company's cost of capital is 10%, what is the expected net present value?
c. Should the company buy the equipment?
Explain?

Purchase this Solution
Solution Summary

This solution is comprised of a detailed explanation to answer what is the expected cash flow, if the company's cost of capital is 10%, what is the expected net present value, and should the company buy the equipment.

Solution Preview

a. What is the expected cash flow?

First, you need to calculate the additional annual cash flow for ten years by multiplying the probability with the cash flow as follows: -

Probability x Cash Flow

.15 x $60,000 = 9,000
.25 x $85,000 = 21,250
.45 x $110,000 = 49,500
.15 ...

Purchase this Solution
Free BrainMass Quizzes
Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

View More Free Quizzes
Related BrainMass Solutions

  • Finance: 5 multiple Choice Questions

    A) the net tax effect on losing the depreciation of the equipment from the disposal point on. B) anticipated salvage value.

  • Capital Budgeting- calculating NPV, rate of return, after tax

    . -151,000 e. insufficient information to estimate an NPV Answer: D NPV is calculated by finding the present value of each cash flow, including both cash inflows and outflows, discounted at the project's cost of capital.

  • Capital Budgeting Decisions - Chicago Valve Company

    Prepare a complete cash flow analysis for the project, showing for each year, the Depreciation Cash Savings, After-Tax Cost Savings, and Net Cash Flow, as well as the initial cash outflow for Year 0. 2. What is the project's NPV?

  • Guillermo

    250233 NPV Focus on the analysis of different alternatives available to Guillermo. 1. Calculate NPV of future cash flows for each of the alternatives.

  • NPV, Project Analysis, WACC

    438171 NPV, Project Analysis, WACC Directions: Answer the following five questions on a separate document. 1. Which of the following statements is CORRECT? a.

  • Net Present Value (NPV)

    Analyze the following scenario: Duncombe Village Golf Course is considering the purchase of new equipment that will cost $1,200,000 if purchased today and will generate the following cash disbursements and receipts.

  • Multiple-choice: decision tree analysis and capital expenditure project

    A real option is available at an initial cost of $800,000 which will add a single $6M cash inflow to this best case path at its end. The option doesn't have a significant effect on the project's risk. What is the option's value?

  • capital budgeting

    Income tax effect of the cash savings, additional sales, depreciation of the equipment, loss from selling the ink and paper supplies. 2. No maintenance-related cash flows for the equipment were included in the analysis.

  • Operating Cash Flows

    Externalities refer of the effect of new capital budgeting project undertaken on the existing projects. The effect may be a positive or a negative effect.

  • Compute NPV and IRR

    The new equipment can be salvaged at the end of the project (end of YR 5) for $1,500,000. 10. Use Rondo's WACC of 10% to discount the project cash flows. Create an Excel cash flow spreadsheet and calculate the NPV and IRR.

View More Related Solutions