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Making equipment purchase decission by NPV method

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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%.

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Solution Summary

Solution explains the steps for determining whether an equipment should be purchased or not using NPV criteria.

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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 ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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