Penny Company has an opportunity to sell some equipment for $40,000. Such a sale will result in a tax-deductible loss of $4,000. If the equipment is not sold, it is expected to produce net cash inflows after taxes of $8,000 for the next 10 years. After 10 years, the equipment can be sold for its book value of $4,000. Assume a 40% federal income tax rate.
1) Management currently has other opportunities that will yield 18%. Using the net present value method, show whether the company should sell the equipment. Prepare a schedule to support your conclusion.