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Should dropit fast replace the equipment-car

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Question - 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.

Assuming 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: EM133074158

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