If I was to buy a piece of equipment costing $200,000 and have an expected life of 10 years and look to generate an increase in net income of $35000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
Probabilities After-Tax Net Income Expected Value of EAT
Recession .3 ($15,000)
Normal .5 $25,000
Boom .2 $35,000
If you use the straight line depreciation and the cost of capital is 14%. What is the expected NPV? Should I purchase the equipment?
Please see the response to your posting as below:
Expected EAT = 0.3*($15000)+0.5*$25000+0.2*35000 =($4500)+$12500+$7000 ...
Solution shows calculations of expected earnings, depreciation , after tax cash flows and expected NPV.