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The manager of the firm Global X is contemplating the purchase of a new piece of...

The manager of the firm Global X is contemplating the purchase of a new piece of capital equipment. This new piece of capital equipment will cost $300,000 to purchase and is expected to have a useful life of 5 years. It is expected that this new piece of capital equipment will yield cost reductions to the firm of $50,000 in the first year, $60,000 in the second year, $70,000 in the third year, and $80,000 in the fourth and fifth years each. Global X's cost of capital is currently 7%.

The accountant for Global X claims that, due to the cost savings, the new piece of capital equipment is a worthwhile capital investment to the firm. The managerial economist for the firm, however, cautions the firm against purchasing the new piece of capital equipment, claiming that it does not add value to the firm. Is the managerial economist correct? Explicitly show and explain why or why not.

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