The owner of a construction company is contemplating possible purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years and a zero terminal salvage value. The equipment is Class 8 (20% declining balance).
The equipment would generate $125,000 of additional annual revenue, but yearly expenses for additional labour and material would also increase by $115,000.
Assume the appropriate tax rate is 20 percent. The required after-tax rate of return is 14 percent.
The following data are for an interest rate of 14 percent and 8 periods. Required: Compute the net present value of the investment. Should the equipment be purchased?

Question

The owner of a construction company is contemplating possible purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years and a zero terminal salvage value. The equipment is Class 8 (20% declining balance).
The equipment would generate $125,000 of additional annual revenue, but yearly expenses for additional labour and material would also increase by $115,000.
Assume the appropriate tax rate is 20 percent. The required after-tax rate of return is 14 percent.
The following data are for an interest rate of 14 percent and 8 periods.  Required: Compute the net present value of the investment. Should the equipment be purchased?

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The Answer of The owner of a construction company is contemplating possible purchase of new equipment. The equipment would cost $40,000, have an expected life of 8 years and a zero terminal salvage value. The equipment is Class 8 (20% declining balance).
The equipment would generate $125,000 of additional annual revenue, but yearly expenses for additional labour and material would also increase by $115,000.
Assume the appropriate tax rate is 20 percent. The required after-tax rate of return is 14 percent.
The following data are for an interest rate of 14 percent and 8 periods.  Required: Compute the net present value of the investment. Should the equipment be purchased?

The Owner of a Construction Company Is Contemplating Possible Purchase