TriMart is considering replacing 20 of their checkout registers with new self-checkout equipment. The equipment currently being used is fully depreciated and has no disposal value. The new equipment will cost a total of $220,000. Because the new equipment is self-serve, TriMart will have annual incremental cash savings in labor costs of $60,000 per year. The equipment will have a 5-year useful life and no terminal disposal value. The equipment will be depreciated using the straight-line method. TriMart requires a 4% real rate of return.

Required

1. Given the preceding information, what is the net present value (NPV) of the new equipment? Ignore taxes.
2. Assume the $60,000 cost savings are in current real dollars and the inflation rate is 2%. Recalculate the NPV of the project.
3. Based on your answers to requirements 1 and 2, should TriMart buy the new checkout equipment?
4. Now assume that the company’s tax rate is 20%. Calculate the NPV of the equipment assuming no inflation.
5. Again assuming that the company faces a 20% tax rate, calculate the NPV of the equipment under an inflation rate of 2%.
6. Based on your answers to requirements 4 and 5, should TriMart buy the new checkout equipment?