BPA Corporation is considering the purchase of a new electronic painting equipment to replace the existing equipment

Question:

BPA Corporation is considering the purchase of a new electronic painting equipment to replace the existing equipment that has a book value of 3,000 and can be sold for 1,500. The old equipment is being depreciated on a straight-line basis and its estimated salvage value 3 years from now is zero. The new equipment will reduce costs (before taxes) by 7,000/year. The new equipment has a 3-year life, it costs 14,000 and it can be sold for an expected 2,000 at the end of the third year. The new equipment would be depreciated over its 3-year life using the MACRS method. BPA's cost of capital is 16 percent and its tax rate is 40 percent.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Corporation
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