The Scranton Clinic, a for-profit medical facility, is planning to spend $35,000 for modernized MRI equipment. It will replace equipment that has zero book value and no salvage value, although the old equipment would have lasted another 10 years.
The new equipment will save $6,000 in cash operating costs for each of the next 10 years, at which time the clinic will sell it for $8,500. A major overhaul costing $9,000 will occur at the end of the seventh year; the old equipment would require no such overhaul. The entire cost of the overhaul is deductible for tax purposes in the seventh year. The equipment has a 3-year recovery period. The clinic uses MACRS depreciation for tax purposes.
The required rate of return is 8%. The applicable income tax rate is 44%.
Compute the after-tax NPV. Is the new equipment a desirable investment?

  • CreatedNovember 19, 2014
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