The president of E-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 per cent and the required after-tax rate of return is 14 per cent.

1. Compute the NPV, assuming straight-line depreciation of €80,000 yearly for tax purposes.

Should E-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 E-Games acquire the equipment? Show computations.

3. Ignore number 2. Suppose the required after-tax rate of return is 10 per cent instead of 14 per cent. Should E-Games acquire the equipment? Show computations.