Considering the acquisition of production equipment

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Reference no: EM13883277

A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $100,000 and it will be depreciated on a straight-line basis down to $0. The useful life of the equipment is five years, and it will have a $20,000 market value at the end of five years. Operating costs will be reduced by $30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by $5,000 throughout the life of the project. The firm’s tax rate is 35 percent and the required return is 16 percent. Should the firm purchase this production equipment?

Reference no: EM13883277

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