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Company X is considering purchasing a new piece of equipment for their manufacturing plant. The equipment's purchase price including modifications is $170,000, and the equipment

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Company X is considering purchasing a new piece of equipment for their manufacturing plant. The equipment's purchase price including modifications is $170,000, and the equipment will be fully depreciated at the time of purchase. The equipment would be sold after 3 years for $60,000. Use of the equipment would require an increase in net working capital (spare parts inventory) of $8,000. The equipment would have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs, mainly labor. The firm's marginal federal-plus-state tax rate is 25% and the firm's WACC is 10%. Should the project be accepted and the new piece of equipment be purchased? Yes No

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