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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 cash flows and depreciation (based upon the use of the 5-year MACRS Schedule and Table 12-9) for the new equipment is as follows:

Cash Flow 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

1 2 3 4 5 6
EBDT
- D
EBT
T (36%)
EAT
+ D
Cash Flow

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?

Net Present Value

Year Cash Flow
(inflows)
PVIF at 10%
Present Value
1
2
3
4
5
6
Present value of inflows
Present value of outflows
Net present value

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Solution Summary

The problem set deals with evaluating a project for suitability.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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