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 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?
Adapted From: Foundations of Financial Management, 13th Edition, Block, Hirt, and Danielsen, 2009 McGraw-Hill Irwin