In considering an investment, the cost of new equipment is $2 million each and installation is $1.3 million each. The company is considering purchasing 5 units. This purchase will allow service to 300 more customers, but the additional services are only needed 40 days a year. The cost to run extra equipment will be $500 per day for each of the 200 days that the business is open each year. Customer tickets are $55 a day and added expenses to each customer will be $5. Economic life of new equipment is 20 years.
How to find the before tax NPV with required rate of return of 14%, and also after tax NPV with required rate of return of 8% when income tax rate is 40% and MACRS recovery period is 10 years.
Will the investments be profitable?
In Excel, the solution is laid out and calculated with explanation.