H and Y Service Station is planning to invest in automatic car wash equipment valued at $250,000. The owner estimates that the equipment will increase annual net cash inflows by $46,000. The equipment is expected to have a ten-year useful life with an estimated residual value of $50,000. The company requires a 14 percent minimum rate of return.
Using the net present value method, prepare an analysis to determine whether the company should purchase the equipment. How important is the estimate of residual value to this decision?