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ou are evaluating the purchase of equipment for a house painting business. The total cost of...

ou are evaluating the purchase of equipment for a house painting business. The total cost of the equipment is $27,000. You paid a consultant $1,000 to estimate the revenues expected from the equipment. The firm selling the equipment charges $600 for shipping.

The project's incremental operating cash flows before taxes will be $12,000 per year for four years. At the end of four years the equipment will have no value and will be scraped. The equipment has a three-year useful life and will be depreciated using the three-year MACRS depreciation schedule (assume these depreciation percentages: Yr 1: 33.3%, Yr 2: 44.5%, Yr 3: 14.8%, and Yr 4: 7.4%). The tax rate is 34% and the firm's required rate of return is 17%.

Calculate the cash flows from Years 0 through 4.

Should you purchase the equipment?

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Answer #1
0 1 2 3 4
Incremental operating cash flows before tax 12000 12000 12000 12000
Depreciation-3 Year MACRS 9191 12282 4085 2042
Incremental NOI 2809 -282 7915 9958
Tax at 34% 955 -96 2691 3386
NOPAT 1854 -186 5224 6572
Add: Depreciation 9191 12282 4085 2042
OCF 11045 12096 9309 8614
Capital investment 27600
FCF -27600 11045 12096 9309 8614
PVIF at 17% 1 0.85470 0.73051 0.62437 0.53365
PV at 17% -27600 9440 8836 5812 4597
NPV 1086
YES, THE EQUIPMENT CAN BE PURCHASED AS THE NPV IS POSITIVE.
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