Reference no: EM13793569
The total acquisition cost of the equipment is $300,000. To raise the necessary capital, Southwest will have to sell stock valued at $200,000 (the stock pays dividends of $24,000 per year) and borrow $100,000 at an annual interest rate of 6% per year.
Jan estimates the new testing equipment will produce a net cash inflow of $50,000 per year. Assume the average annual net income is $35,000. The estimated life of the equipment is 20 years.
Given: WACC = 10.02%, Given: Accounting Rate of Return = 11.67%
1. Compute the (Net Present Value) NPV of the test equipment. Please Show Calculations.
Note: If you use (Present Value Interest Factor) PVIF, in calculations, please explain the equation and where it can be found.
2. Would you expect IRR to be higher or lower than Southwest’s W.A.C.C.? Why?
3. Should the equipment be purchased? Why?
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: The total acquisition cost of the equipment is $300,000. To raise the necessary capital, Southwest will have to sell stock valued at $200,000 (the stock pays dividends of $24,000 per year) and borrow $100,000 at an annual interest rate of 6% per year..
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