Making equipment purchase decission by NPV method
Not what you're looking for?
A Company, whose current earnings put them in 35% marginal tax bracket, is considering purchasing a piece of equipment for $25,0000. The equipment will be depreciated using the straight line method over a 4 year useful life to a salvage value of $5000. It is estimated that the equipment will increase the company's earnings by $8,000 for each of the 4 years. Should the equipment be purchased? Assume a MARR of 10%.
Purchase this Solution
Solution Summary
Solution explains the steps for determining whether an equipment should be purchased or not using NPV criteria.
Solution Preview
Please refer attached file for better clarity of formulas and tables in MS Excel.
Solution:
Cost of equipment=25000 dollars
Depreciation per year=
(Cost-Salvage Value)/period=5000 dollars
Tax benefit on depreciation=1750 dollars
Increase in income =8000 dollars
Taxes on Income @35%=2800 dollars
Increase in income (net )=5200 dollars
Salvage Value=5000 dollars
We assume ...
Education
- BEng (Hons) , Birla Institute of Technology and Science, India
- MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
- "Thank you"
- "Really great step by step solution"
- "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
- "Thanks Again! This is totally a great service!"
- "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.