Reference no: EM131987645

QuattroMarti Company (QMC), a clothing and accessories producing firm, is planning to purchase a new and more efficient packing and labelling equipment to replace the old one that was bought and installed five years ago for $200,000(including shipping and installation). The old equipment has been depreciated using straight-line method with an expected useful life of 10 years and zero salvage value. QMC management believes they can sell the old equipment for $120,000, which is its current market value. The new equipment, which QMC is considering to purchase, has price $280,000 with extra $20,000 shipping and installation cost. The new equipment falls into the MACRS 5-year class. The management expects to sell the new equipment for $140,000 at the end of the fifth year. The new equipment, due to its higher efficiency, is expected to reduce operating cost by of $20,000 and to increase production and sales by $130,000 per year, both before taxes. QMC’s marginal tax rate is 40 percent and its cost of capital is 16%. According to the approved capital budgeting guidelines of the company, QMC uses both NPV and MIRR to evaluate investment projects.