Bottoms Up Diaper Service is thinking of the purchase of new industrial washer. It can buy washer for $6,000 and sell its old washer for $2,000. New washer will last for 6 years and save $1,500 a year in expenses. Opportunity cost of capital is 16 percent, and firm's tax rate is 40 percent.
a. If firm uses straight-line depreciation to the assumed salvage value of zero over 6-year life, write down cash flows of project in Years 0-6? New washer will actually have zero salvage value after 6 years, and old washer is completely depreciated.
b. Determine project NPV?
c. What is NPV if firm utilizes MACRS depreciation with 5-year tax life?