Question
Thoma Pharmaceutical Company may buy DNA testing equipment costing $60,000. This equipment is expected to reduce labour costs of clinical staff by $20,000 annually. The
Thoma Pharmaceutical Company may buy DNA testing equipment costing $60,000. This equipment is expected to reduce labour costs of clinical staff by $20,000 annually. The equipment has a useful life of five years. $5,000 salvage value is expected at the end. The corporate tax rate for Thoma is 38 percent, and its required rate of return is 15 percent. On the basis of this information, what is the net present value of the project? Is it acceptable? suppose that 6 percent inflation in cost savings from labour is expected over the last four years, so that savings in the first year are $20,000, savings in the second year are $21,200, and so forth. If the required rate of return is still 15 percent, what is the net present value of the project? Is it acceptable? If a working capital requirement of $10,000 were required in addition to the cost of the equipment and this additional investment were needed over the life of the project, what would be the effect on net present value?
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