Problem:
Golden Corporation is considering the purchase of new equipment costing $200,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $35,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
Probabilities After Tax Net Income Expected Value of EAT
Recession .3 ($15,000)
Normal .5 $25,000
Boom .2 $35,000
The equipment will be depreciated using straight line depreciation. Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?