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    Computing NPV to Determine Purchase Feasibility

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    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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    Solution Summary

    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.