Using the net present value method, determine whether new equiptment should be purchased.
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New Equipment
The Office Equipment Company has offered to sell some new packaging equipment to the Diaz Company. The list price is $42,000, but Office Equipment has agreed to accept some old equipment in trade. A trade-in allowance of $9,000 was agreed upon. The old equipment was carried at a book value of $7,700 and could be sold outright for $6,000 cash. Cash operating savings are expected to be$5,000 annually for the next 12 years. The minimum desired rate of return is 12 percent. The old equipment has a remaining useful life of 12 years. Both the old and the new equipment will have zero disposal values 12 years from now.
Should Diaz buy the new equipment? Show your computations, using the net present value method. Ignore income taxes.
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Solution Summary
Using the net present value method, this solution determines whether new equipment should be purchased. It is included in an Excel file.
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