Problem
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $6,000 and sell its old washer for $2,000. The new washer will last for 6 years and save $1,500 a year in expenses. The opportunity cost of capital is 15 percent, and the firm's tax rate is 40 percent.
1) If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is project's NPV?
2) What will NPV be if the firm uses MACRS depreciation with a 5-year tax life?