Chester Constructions is an engineering consulting firm specialising in the installation of electronic communications systems. The company is considering the purchase of testing equipment that will be used on jobs. The equipment will cost $1 740 000 and will have no residual value at the end of its 6-year life.

The firm’s accountant projects revenue and expenses with the operation of the equipment that are equal to the cash inflows and cash outflows associated with it, except for depreciation. A summary of the cash flows expected from the equipment (without considering taxes) is as follows.

Assume the company’s cost of capital is 12% and its expected tax rate is 30%.
Required

(a) Calculate the return on average investment for the equipment.

(b) Determine the annual net cash inflows (after tax) expected from the operation of the equipment.

(c) Calculate the net present value for the investment.

(d) Determine the net present value index for the investment.

(e) Should the testing equipment be purchased? Explain why.

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Year Revenues 123456 $820,000 800 000 780000 810000 820 000 820 000 Expenses (excluding depreciation) $420000 390 000 410000 400 000 390 000 430000