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
$\begin{array}{llr}&\text { After tax Probabilities }&\text { Net Income }\
\text { Recession } & .5 & (\$ 20,000) \
\text { Normal } & .3 & 40,000 \
\text { Boom } & .2 & 60,000
\end{array}$ 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?

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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
$\begin{array}{llr}&\text { After tax Probabilities }&\text { Net Income }\
\text { Recession } & .5 & (\$ 20,000) \
\text { Normal } & .3 & 40,000 \
\text { Boom } & .2 & 60,000
\end{array}$ 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