Business Assignment- Columbia Enterprises

Business Assignment- Columbia Enterprises

Columbia Enterprises is studying the replacement of some equipment that originally cost
$74,000. The equipment is expected to provide six more years of service if $8,700 of
major repairs are performed in two years. Annual cash operating costs total $27,200.
Columbia can sell the equipment now for $36,000; the estimated residual value in six
years is $5,000.
New equipment is available that will reduce annual cash operating costs to $21,000. The
equipment costs $103,000, has a service life of six years, and has an estimated residual
value of $13,000. Company sales will total $430,000 per year with either the existing or
the new equipment. Columbia has a minimum desired return of 12% and depreciates all
equipment by the straight-line method.
Instructions:
a. By using the net-present-value method, determine whether Columbia should keep
its present equipment or acquire the new equipment. Round all calculations to the
nearest dollar, and ignore income taxes.
Price of new equipment $103,000 – $36,000 old equipment value = 67,000
Depreciation = 103,000 – 13,000 residual value = 900,000/6= 15000
8700 + 27200= 35900
5000
yr 0
yr 1 12% =0.893

-67000 1

= -67,000

14900 x 0.893 = 13306

yr 2 12% = 0.797

14900 x 0.797 = 11875

yr 3 12% = 0.712

6200 x 0.712 = 4414

yr 4 12% = 0.636

6200 x 0.636 = 3943

yr 5 12% = 0.567

6200 x 0.567 = 3515

yr 6 12% = 0.507

6200 x 0.507 = 3143

Yr 6

8000 x 0.507 = 4056

NPV

= - 22,753