Estimated salvage value

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Consider the case of DropIt Fast Parcel Company, working hard during the Corona virus lockdown.

Dropit Fast is considering purchasing some new equipment to replace existing equipment ( i.e. delivery car) that has a book value of zero, but market value of $15,000

The new equipment costs $90,000 and is expected to provide production savings and increased profits of $20,000 per year for the next ten years.

The new equipment has an expected useful life of ten years, after which the estimated salvage value would be $10,000.

Asuming straight-line depreciation, a 34% effective tax rate, and a cost of capital (i.e. discount rate) of 12%, should DropIt Fast replace the equipment/car?

Reference no: EM133056345

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