Should the new equipment be purchased


Problem: Watson Leisure Time Sporting Goods has improved operations over time and the company needs to make a decision related to an equipment decision.

The company plans to purchase a new piece of equipment (to be used over a six year period) for $320,000.

Assume the EBDT and depreciation (based upon the use of the 5-year MACRS Schedule and Table 12-9) for the new equipment is as follows:

EBDT    Depreciation
1    $120,000    $64,000
2    105,000    102,400
3    80,000    61,440
4    65,000    36,800
5    53,000    36,800
6    45,000    18,560

The firm has a 36 percent tax rate. Assuming depreciation is the only expense and based upon the cost of capital of 10%, calculate the net present value (NPV). Should the new equipment be purchased?

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Finance Basics: Should the new equipment be purchased
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