A company is considering the purchase of new equipment costing $80,000. The expe

Question

A company is considering the purchase of new equipment costing $80,000. The expected life of the equipment is 10 years. The potential increase in the annual net income from the new equipment for the next 10 years depends on the state of the economy.

Probabilities - After Tax Net Income - Expected Value of Earning after tax

Recession - 0.3 - ($15,000)

Normal - 0.5 - $25,000

Boom - 0.2 - $35,000

The equipment will be depreciated using the straight line depreciation. The companies cost of capital is 14%.

1) What is the expected NPV?

2)Should the company purchase the new equipment?

Explanation / Answer

Recession

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