How much value will the new equipment create for the firm

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Point 1: A firm believes it can generate an additional $4,200,000 per year in revenues for 4 years and then $4,600,000 per year in revenues for another 4 years (a total of 8 years) if it replaces existing equipment that is no longer usable with new equipment that costs $6,200,000. The existing equipment has a book value of $35,000 and a market value of $10,000. The firm expects to be able to sell the new equipment when it is finished using it (after 8 years) for $200,000. The contribution margin is expected to be 48% of revenue annually. The additional sales will require an initial investment in net working capital of $420,000, which is expected to be recovered at the end of the project (after 8 years). Assume the firm uses straight line depreciation, its marginal tax rate is 25%, and the discount rate for the project is 16%.

Question a) How much value will this new equipment create for the firm?

Reference no: EM132502621

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