Corporation is considering the purchase of manufacturing equipment with a 10-year midpoint in its asset depreciation range and the deprecation schedule is attached. The asset will cost $80,000, and it will produce earnings before depreciation and taxes of $28,000 per year for three years, and then $12,000 a year for seven more years. The firm has a tax rate of 34 percent. With a cost of capital of 12 percent, should it purchase the asset? Explain your reasoning.

Year

Depreciation Base

Annual Depreciation

1

$80,000

$11,440

2

80,000

19,600

3

80,000

14,000

4

80,000

10,000

5

80,000

7,120

6

80,000

7,120

7

80,000

7,120

8

80,000

3,600

$80,000

Part 2

Discuss all aspects of the working capital decision involved if this equipment were to be purchased (borrow, bonds, cash, equity). Fully discus the positive and negative factors to be considered for every option and their possible effects on each other.