Looner Industries is currently analyzing the purchase of a research equipment th

Question

Looner Industries is currently analyzing the purchase of a research equipment that costs $160,000 and requires $20,000 in installation costs. The firm will depreciate the equipment under MACRS using a 3-year asset class and expects to sell the equipment $10,000 at the end of its 3-year economic life. The equipment should reduce pre-tax operating costs (excluding depreciation) by $30,000 a year and has a required rate of return estimated at 14 percent. Looner is subject to a 40 percent marginal tax rate. What is the NPV of this project? PLEASE SHOW WORK.

Explanation / Answer

Year1 Year2 Year3 Pre Tax saving in operting cost 30000 30000 30000 Depreciation 59994 80010 26658 Tax Expenses -11997.6 -20004 1336.8 Cash flow 41997.6 50004 28663.2 Post tax salvage value =10000+(13338-10000)*40% 11335.2 Net cash Flow 41997.6 50004 39998.4 PV 36840 38476.45 26997.78 NPV -77685.77 =36840+38476.45+26997.78-180000

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