Question: The president of Big Fish Games an online gaming company

The president of Big Fish Games, an online gaming company, is considering the purchase of some equipment used for the development of new games. The cost is $400,000, the economic life and the recovery period are both 5 years, and there is no terminal disposal value. Annual pretax cash inflows from operations would increase by $130,000, giving a total 5-year pretax savings of $650,000. The income tax rate is 40%, and the required after-tax rate of return is 14%.
1. Compute the NPV, assuming straight-line depreciation of $80,000 yearly for tax purposes. Should Big Fish Games acquire the equipment?
2. Suppose the asset will be fully depreciated at the end of year 5 but is sold for $25,000 cash. Should Big Fish Games acquire the equipment? Show computations.
3. Ignore number 2. Suppose the required after-tax rate of return is 10% instead of 14%. Should Big Fish Games acquire the equipment? Show computations.




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  • CreatedNovember 19, 2014
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