Your firm is considering purchasing a new piece of equipment that would cost $400,000. It will last 10 years, after which it can be sold for $50,000. The new equipment will generate cost savings of

$60,000 per year over the firm’s existing equipment, which has a book value of $20,000 and could be sold now for $40,000. Your firm has a tax rate of 25% and a required rate of return of 12%.

Calculate the net initial investment.

Calculate the annual cash flows.

Discount the annual cash flows and the terminal cash flows to present value.

Find the net present value of purchasing the new equipment.