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Should the equipment be purchased

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Question - Aple Pie has a cost-plus-fixed fee contract with the air force to build jets. The government will buy any additional equipment that it needs on a justified cost-savings basis. The incremental tax rate for the company is 25%. The company has computed the following labor savings for a new equipment that costs $45000:

 

Period 1

Period 2

Before Tax

$30,000

$30,000

After Tax

$22,500

$22,500

The company has an after-tax time value of money of 6.5% and the federal government has a before-tax time value of money of 4%. Should the equipment be purchased?

Reference no: EM132946005

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