Nas intends to buy an equipment to boost its production of product X as
the demand for the product has substantially increased overtime. The equipment
will cost $24,000 and will last for 6 years after which it will have a nil
residual value. The financial report on the equipment shows that it will have
the following profit or loss figures for the 6-year period
The equipment is depreciated on a straight line method. The profit or loss report above was arrived at after providing for annual depreciation on the equipment.
Year Description Amount
1. Loss for the year ($25,000)
2. Loss for the year ($8,000)
3. Loss for the year ($1,500)
4. Profit for the year $6,500
5. Profit for the year $17,000
6. Profit for the year $40,000
The equipment is depreciated on a straight line method. The profit or loss report above was arrived at after providing for annual depreciation on the equipment.
Required
Should
the equipment be purchased?
Solution
Redraft
the profit or loss figures and add back depreciation.
Depreciation amount charged is 24000/6 = $4,000
The
reason is that figures given were arrived at after deducting depreciation value
of $4,000
Advice
Since the net present
value of the equipment is positive, it should be undertaken
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