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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:

  1. Compute the NPV of the project at each discount rate.
  2. Find the IRR for the project.
  3. Determine the profitability index for the project.
  4. Recommend whether the firm should proceed with the investment.

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