Question
Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment would be depreciated by the straight-line method over its
Med Inc. is considering the purchase of a new equipment to produce face marks. The equipment would be depreciated by the straight-line method over its 4-year life, and would have a $10,000 salvage value. Accounts payable will rise by $5,000 at time 0 but will be recovered at the end of the projects life. Revenues and annual operating costs are expected to be constant over the project's 4-year life. The other information is shown below.
Risk-adjusted WACC 12.0%
Equipment purchase cost (depreciable basis) $90,000
Sales revenues, each year $50,000
Annual operating costs (excl. depreciation) $20,000
Tax rate 30.0%
a). What is the project's NPV?
b). If the depreciation method is MACRS 3-year class (33%, 45%, 15%, 7%), will the NPV calculated be affected? (Briefly explain. No calculation is required)
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