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
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?
NPV = PV of cash flows - initial investment
The initial investment = $320,000
We are given the cash flows over the life of the ...
The solution explains how to decide whether the equipment should be purchased.