Red River Corporation is considering the purchase of new equipment costing $500,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $60,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
After tax
The equipment can be amortized using straight-line amortization for tax purposes. Red River's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment? Would your decision change if the cost of capital was 9%? Why or why not?

Question

Red River Corporation is considering the purchase of new equipment costing $500,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $60,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
After tax
  The equipment can be amortized using straight-line amortization for tax purposes. Red River's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment? Would your decision change if the cost of capital was 9%? Why or why not?

Quizplus · Accepted Answer

The Answer of Red River Corporation is considering the purchase of new equipment costing $500,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $60,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy.
After tax
  The equipment can be amortized using straight-line amortization for tax purposes. Red River's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment? Would your decision change if the cost of capital was 9%? Why or why not?

Red River Corporation Is Considering the Purchase of New Equipment