0. A taxable entity is planning to purchase an equipment that will save 2,000 per year for 5 years. Cost of the equipment is 7,000. For tax purposes, this machine can be depreciated in 3 years using the straight line method. Assume tax rate to be 40% and discount rate to be 9%.

   1. a) What is the free cash flow from buying the equipment? (10)

   2. b) What is the NPV of the project? (Hint: Find the PV of values found in part a and then subtract cost of

      the equipment.) (4)

   3. c) Should the entity purchase the equipment? (1)

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