Planning to purchase equipment-capital budgeting techniques

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Reference no: EM131049649

ZPM Corporation (ZPMC) is planning to purchase new equipment. If equipment is purchased, it will replace the old equipment purchased 10 years ago for $105,000, which is being depreciated on a straight-line basis to a zero salvage value (15-year depreciable life). The old equipment can be sold for $60,000. The price of new equipment will be $180,000; however, there are additional costs of $15,000 for installation and $5,000 for transportation. The new equipment will be depreciated using MACRS over its 5-year class life and it will be sold at its book value at the end of the fifth year. The firm expects to increase its revenues by $18,000 per year if the new equipment is purchased, but cash expenses will also increase by $2,500 per year. The new equipment will require an increase of $2,000 net in working capital. ZPMC's cost of capital is 10 percent and its tax rate is 35 percent. ZPMC’s policy is to use two different capital budgeting techniques, IRR and NPV, to evaluate the projects.

Please advise ZPMC if the company should replace the old equipment based on ZPMC’ policy, Justify your advice for ZPMC management, and show all your calculations.

Reference no: EM131049649

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