DC Fragrance intends to purchase new fragrance-mixing equipment for a $245,000 initial investment. The equipment generates an annual after-tax cash inflow of $68,500 for 5 years.
a. Determine the net present value (NPV) of the equipment, assuming that the firm has a 15% cost of capital. Is the project acceptable?
b. If the firm’s cost of capital is lower than 15%, does the investment in equipment become more or less desirable? What is the highest cost of capital (closest whole percentage rate) that the firm can have and still find that purchasing the equipment is worthwhile? Discuss this finding in light of your response in part a.