My neighbor, Mrs. Dubois, is the accountant for the cranberry processing plant.  The plant has a piece of equipment, nicknamed Harvey that is used to clean and prepare the harvested cranberries.  Mrs. Dubois needs to determine if Harvey should be replaced with a newer, better version.  Using the NPV tool, we will provide her a recommendation.   Facts provided: 1. Old Cranberry Cleaner (Nickname: Harvey) Cost $260,000 2. Harvey’s Accumulated Depreciation $150,000 3. Cash Sales Price for Harvey $60,000 4. New

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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My neighbor, Mrs. Dubois, is the accountant for the cranberry processing plant.  The plant has a piece of equipment, nicknamed Harvey that is used to clean and prepare the harvested cranberries.  Mrs. Dubois needs to determine if Harvey should be replaced with a newer, better version.  Using the NPV tool, we will provide her a recommendation.

 

Facts provided:

1.

Old Cranberry Cleaner (Nickname: Harvey) Cost

$260,000

2.

Harvey’s Accumulated Depreciation

$150,000

3.

Cash Sales Price for Harvey

$60,000

4.

New Equipment Cost

$448,000

5.

New Equipment Depreciation (Each Year)

$44,800

6.

New Equipment Net Cash Revenues (Each Year)

$482,000

7.

New Equipment Net Cash Expenses (Each Year)

$365,000

8.

New Equipment Estimated Useful Life

10 Years

9.

Tax Rate

40%

10.

Cost of Capital

10%

 

Step 1 A: Identify both the timing and amount of cash inflows and cash outflows

(A) Compute the inflows & outflows for any assets that will be sold.

(B) Compute the inflows & outflows the assets that are being considered.

Step 2Compute the present value of future cash flows, using the company’s cost of capital as the interest rate.

Step 3:   Compute the Net Present Value (NPV)

Step 4:  Accept or reject based on Step #3

  1. NPV > 0: Accept the Investment
  2. NPV < 0: Reject the Investment
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