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A firm plans to expand its operations by purchasing new equipment costing $750,000. The equipment has an expected life of 8 years and will have
A firm plans to expand its operations by purchasing new equipment costing $750,000. The equipment has an expected life of 8 years and will have no salvage value. The firm expects the equipment to generate annual cash flows of $150,000. The company's tax rate is 40%. The following are the present value factors for an 8-year period:
Discount Rate | Cumulative Factors |
8% | 5.747 |
10% | 5.335 |
12% | 4.968 |
14% | 4.635 |
16% | 4.325 |
Requirements:
- Compute the NPV of the project at each discount rate.
- Find the IRR for the project.
- Determine the profitability index for the project.
- Recommend whether the firm should proceed with the investment.
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