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:
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?
Using an Excel 97-2003 spreadsheet, this solution determines the feasibility of purchasing new equipment given the cost of the equipment and the firm's expected EBIDTA, depreciation expense, tax rate, and cost of capital.