Pierce Company is considering the purchase of new equipment that will cost $150,000.The equipment will save the company $48,000 per year in cash operating costs.The equipment has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%.
Required:
1)Assuming the company is subject to a 40% tax rate,compute the net present value.
2)Compute the amount of the annual depreciation tax shield provided by the new equipment.
3)Should the equipment be purchased? Why or why not?

Question

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The Answer of Pierce Company is considering the purchase of new equipment that will cost $150,000.The equipment will save the company $48,000 per year in cash operating costs.The equipment has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%.
Required:
1)Assuming the company is subject to a 40% tax rate,compute the net present value.
2)Compute the amount of the annual depreciation tax shield provided by the new equipment.
3)Should the equipment be purchased? Why or why not?

Pierce Company Is Considering the Purchase of New Equipment That