Considering investing in a new dental instrument

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Reference no: EM13806028

West Side Dental Group is considering investing in a new dental instrument. The instrument costs $90,000 and can be depreciated to zero on a straight-line basis over its life of 3 years. The instrument is expected to have no salvage value. Currently, revenues are expected to be $45,000 per year, and costs are estimated at $10,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 5% per year. The risk free rate of interest is 2% and the real interest rate (cost of capital) is 4%. And, given the expected inflation rate, the nominal interest rate (cost of capital) is 9.2%. West Side Dental Group is in the 34% corporate tax bracket. Should the investment be undertaken? Show your work clearly.

Reference no: EM13806028

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