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Calculate the initial investment amount.

Calculate the initial investment amount.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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D1.

 

Indigo Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $121,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $40,200. The new equipment can be bought for $176,580, including installation. Over its 10-year life, it will reduce operating expenses from $192,900 to $145,300 for the first six years, and from $209,200 to $190,300 for the last four years. Net working capital requirements will also increase by $20,700 at the time of replacement. It is estimated that the company can sell the new equipment for $24,800 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years. Click here to view the factor table. (a) Calculate the initial investment amount. Initial investment $
Transcribed Image Text:Indigo Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $121,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $40,200. The new equipment can be bought for $176,580, including installation. Over its 10-year life, it will reduce operating expenses from $192,900 to $145,300 for the first six years, and from $209,200 to $190,300 for the last four years. Net working capital requirements will also increase by $20,700 at the time of replacement. It is estimated that the company can sell the new equipment for $24,800 at the end of its life. Since the new equipment's cash flows are relatively certain, the project's cost of capital is set at 10%, compared with 15% for an average-risk project. The firm's maximum acceptable payback period is 5 years. Click here to view the factor table. (a) Calculate the initial investment amount. Initial investment $
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