Question

Managers of Northwest Forge are considering whether to buy some equipment for the company’s Fargo plant. The equipment will cost $2 million cash and will have a 10-year useful life and zero terminal salvage value. Annual pretax cash savings from operations will be $420,000. The income tax rate is 45%, and the required after-tax rate of return is 14%.
1. Compute the NPV, using a 7-year recovery period and MACRS depreciation for tax purposes.
Should the company acquire the equipment?
2. Suppose the economic life of the equipment is 15 years, which means that there will be $420,000 additional annual cash savings from operations in each of the years from 11 to 15. Assume that a 7-year recovery period and MACRS depreciation is used. Should the company acquire the equipment? Show computations.



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  • CreatedNovember 19, 2014
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