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Compute the new equipment net present value

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Reference no: EM133013036

Question - BYOM is a family-owned business that designed and manufactures protective, comfortable and reusable face masks. The masks are made with 2 layers of polyester fabric and a polypropylene filter. Currently, the company dyes the fabric by manually and is considering purchasing a special equipment for this process. The equipment costs $65,800 new. It would last for 7 years and would require a major overhaul for $19,740 at the end of year 4. After 7 years, the equipment could be sold for $3,550.

BYOM estimates that it will costs $11,190 per year to operate the new equipment. The current manual method of dying the fabric costs $12,600 per year. Next, the new equipment will allow the company to increase its production capacity by 14,400 masks per year. BYOM realizes a contribution margin of $2.20 per mask. The company requires a 9% return on all investment in equipment.

Required -

(a) What net annual cash inflows will be provided by the new equipment?

(b) Compute the new equipment's net present value. Use the incremental cost approach, and round all dollar amounts to the nearest whole dollar. Clearly state the PV factor(s) used.

(c) Should BYOM purchase the new equipment? Why or why not?

Reference no: EM133013036

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