XYZ company is deciding to purchase or not new equipment that costs $900,000

Accounting Jun 02, 2021

XYZ company is deciding to purchase or not new equipment that costs $900,000. The management predicts the life of new asset to be four years and expects it to generate an additional $180,000 of annual profits. Moreover, in the fifth year, the company sells the equipment for its residual value of $60,000. This is higher than the company’s current required rate of 9%. The goal is to make sure the company is making better use of its cash.

if you mean IRR is 14%, if not you can assume but mention in solution

Expert Solution

Answer:

The IRR and NPV, both are negative. Hence the company should not purchase the equipment since this is loss making.

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