The president of Big Fish GamesBig Fish Games, an online gaming company, is considering the purchase of some equipment used for the development of new games. The cost is $400,000,

the economic life and the recovery period are both 55 years, and there is no terminal disposal value. Annual pretax cash inflows from operations would increase by $130,000, giving a total 55-year pretax savings of $650,000 The income tax rate is 40%, and the required after-tax rate of return is 14%.

Compute the NPV, assuming straight-line depreciation of $80,000 yearly for tax purposes. Should Big Fish GamesBig Fish Games acquire the equipment?
2.	Suppose the asset will be fully depreciated at the end of year 55 but can be sold for $25,000 cash. Should . Big Fish GamesBig Fish Games acquire the equipment? Show computations.
3.	Ignore number 2. Suppose the required after-tax rate of return is 10% instead of 14%. Should Big Fish GamesBig Fish Games acquire the equipment? Show computations.

Requirement 1. Compute the NPV, assuming straight-line depreciation of $80,000 yearly for tax purposes. Should Big Fish GamesBig Fish Games acquire the equipment?

Begin by computing the net present value (NPV) of the equipment investment. (Round dollar amounts the nearest whole number. Use a minus sign or parentheses for a negative net present value. Enter the present value factor to four decimal places, "X.XXXX.")

	Present Value of
	Ordinary Annuity of $1		Annual Cash		Total Present
	at 5 years, 14%		Inflow		Value
Net present value:
Present value of annuity of equal annual:
After-tax cash flows from operations		x		per year =
After-tax cash savings from depreciation		x		per year =
Less: Initial investment
Net present value

Should Big Fish GamesBig Fish Games acquire the equipment?

Big Fish GamesBig Fish Games_____________ acquire the equipment because the NPV of the investment is ___________

Requirement 2. Suppose the asset will be fully depreciated at the end of year 55 but can be sold for $25,000 cash. Should Big Fish GamesBig Fish Games acquire the equipment? Show computations.

Begin by calculating the net present value of the equipment in this scenario. (Round dollar amounts the nearest whole number. Use a minus sign or parentheses for a negative net present value. Enter the present value factor to four decimal places, "X.XXXX.")

	Present Value
	of $1		Cash		Total Present
	at 5 years, 14%		Inflow		Value
NPV of investment from requirement 1
Present value of lump sum after-tax cash flow
from disposal of equipment at the end of year 5		x		=
Net present value

Should Big Fish GamesBig Fish Games acquire the equipment? Big Fish GamesBig Fish Games______________ acquire the equipment because the NPV of the investment under this scenario is________.

Requirement 3. Ignore number 2. Suppose the required after-tax rate of return is 10%

instead of 14%. Should Big Fish GamesBig Fish Games acquire the equipment? Show computations.

Begin by calculating the net present value of the equipment in this scenario. (Round dollar amounts the nearest whole number. Use a minus sign or parentheses for a negative net present value. Enter the present value factor to four decimal places, "X.XXXX.")

	Present Value of
	Ordinary Annuity of $1		Annual Cash		Total Present
	at 5 years, 10%		Inflow		Value
Net present value:
Present value of annuity of equal annual:
After-tax cash flows from operations		x		per year =
After-tax cash savings from depreciation		x		per year =
Less: Initial investment
Net present value

Should Big Fish Games acquire the equipment? Big Fish GamesBig Fish Games _________ acquire the equipment because the NPV of the investment under this scenario is _________.