Luis is a CPA and manages several accounting firms. He is in the process of upgrading the firm's copiers. He believes he has chosen the right copiers but wants an analysis done to be sure he makes the best decision for the firms. He has hired you to analyze the potential investment. The current machines are leased and would be returned to the lessor. The new copiers would require an initial investment of $25,000 and would be expected to last 5 years and have a salvage value of $3,000. The firms have a cost of capital of 9% and a tax rate of 21%. They are expected to generate a cash inflow of $8,100 per year and would cost $1,500 per year to maintain.
Instructions
a. Calculate the net present value of the copiers.
b. Calculate the profitability index of the copiers.
c. Should Luis purchase the copiers?
d. If the firm's cost of capital was 10%, would that change your decision?
e. If the copiers were only going to generate $7,000 at 9%, would your answer to part b change?

Question

Luis is a CPA and manages several accounting firms. He is in the process of upgrading the firm's copiers. He believes he has chosen the right copiers but wants an analysis done to be sure he makes the best decision for the firms. He has hired you to analyze the potential investment. The current machines are leased and would be returned to the lessor. The new copiers would require an initial investment of $25,000 and would be expected to last 5 years and have a salvage value of $3,000. The firms have a cost of capital of 9% and a tax rate of 21%. They are expected to generate a cash inflow of $8,100 per year and would cost $1,500 per year to maintain. 
Instructions
a. Calculate the net present value of the copiers.
b. Calculate the profitability index of the copiers.
c. Should Luis purchase the copiers?
d. If the firm's cost of capital was 10%, would that change your decision?
e. If the copiers were only going to generate $7,000 at 9%, would your answer to part b change?

Quizplus · Accepted Answer

The Answer of Luis is a CPA and manages several accounting firms. He is in the process of upgrading the firm's copiers. He believes he has chosen the right copiers but wants an analysis done to be sure he makes the best decision for the firms. He has hired you to analyze the potential investment. The current machines are leased and would be returned to the lessor. The new copiers would require an initial investment of $25,000 and would be expected to last 5 years and have a salvage value of $3,000. The firms have a cost of capital of 9% and a tax rate of 21%. They are expected to generate a cash inflow of $8,100 per year and would cost $1,500 per year to maintain. 
Instructions
a. Calculate the net present value of the copiers.
b. Calculate the profitability index of the copiers.
c. Should Luis purchase the copiers?
d. If the firm's cost of capital was 10%, would that change your decision?
e. If the copiers were only going to generate $7,000 at 9%, would your answer to part b change?

Luis Is a CPA and Manages Several Accounting Firms