Net Present Value Problem
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Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. the new washer will last for 6 years and save $1,500 a year in expense. The opportunity cost of capital is 15 percent, and the firm's tax rate is 40 percent.
a. if the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what are the cash flows of the project in years 0-6? the new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.
b. what is project NPV?
c. What will NPV be if the firm uses MACRS depreciation with a 5-year tax life?
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Solution Summary
The attached excel sheet includes full calculations of NPV under two methods of depreciation - Straightline and MACRS
The solution addresses the following problem: Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. the new washer will last for 6 years and save $1,500 a year in expense. The opportunity cost of capital is 15 percent, and the firm's tax rate is 40 percent.
Education
- BA, Ain Shams University, Cairo Egypt
- MBA, California State University, Sacramento
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