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Question - Anterior Inc. has been approached by a vendor regarding an upgrade to a key piece of equipment. The new equipment would provide operating efficiencies for both direct labour and direct materials. The new equipment would result in a total annual savings of $400,000 per year.
The new piece of equipment will cost the company $2,200,000 and will be purchased at the beginning of 2021.
The old equipment currently has a book value of $70,000 but Anterior estimates the fair value of the equipment to be $90,000. The new equipment has a salvage value of $145,000 after its expected useful life of 10 years. Anterior requires a 12% after-tax return on its capital investments.
The new equipment purchase will require an increase in working capital of $130,000 when the equipment is purchased. This amount will be recovered by the company at the end of the 10 years.
Required - Calculate the Net Present Value of this project. Should the project be accepted by the company? Show all calculations.
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