Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?
A) Yes, NPV = $2,090
B) Yes, NPV = $12,390
C) No, NPV = -$63,210
D) No, NPV = -$12,210

Question

Quizplus · Accepted Answer

The NPV is positive, which means that the project is expected to generate a positive return. The correct answer is A.

Ecogen Is Considering the Purchase of Some New Equipment That