A firm believes it can generate an additional $250,000 per year in revenues for the next 5

Question:

A firm believes it can generate an additional $250,000 per year in revenues for the next 5 years if it replaces existing equipment with new equipment that costs $240,000. The firm expects to be able to sell the new equipment when it is finished using it (after 5 years) 10,000. The existing equipment has a book value of $20,000 and a market value of $12,000. Variable costs are expected to total 70% of revenue. The additional sales will require an initial investment in net working capital of $15,000, which is expected to be recovered at the end of the project (after 5 years). Assume the firm uses straight-line depreciation. The firm’s marginal tax rate is 30%. and its weighted-average cost of capital is 10%.

a) What is the required initial investment (at t = 0)?

b) At what discount rate will this project break even?

c) Should the firm purchase the new equipment? Be sure to justify your recommendation.

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...