Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the
Question:
Bottoms Up Diaper Service is considering the purchase of a new industrial washer. It can purchase the washer for $9,600 and sell its old washer for $3,400. The new washer will last for 6 years and save $2,900 a year in expenses. The opportunity cost of capital is 22%, and the firm’s tax rate is 40%.
a. If the firm uses straight-line depreciation to an assumed salvage value of zero over a 6-year life, what is the annual operating cash flow of the project in years 1 to 6? The new washer will in fact have zero salvage value after 6 years, and the old washer is fully depreciated.
b. What is project NPV?
c. What is NPV if the firm uses MACRS depreciation with a 5-year tax life? Use the MACRS depreciation schedule.
Fundamentals of Corporate Finance
ISBN: 978-1260566093
10th edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus