ABC Company is considering the acquisition of a new piece of equipment to replace an old, outdated machine currently used in its business operations. The new equipment would cost $135,000 and is expected to last 9 years. The new equipment would require a repair of $25,000 in year four and another repair costing $80,000 in year eight. Purchasing this new equipment would
require an immediate investment of $30,000 in working capital which would
be released for investment elsewhere at the end of the 9 years. The new
equipment is expected to have a $10,000 salvage value at the end of nine
years. The new equipment is expected to generate a cost savings of $60,000
per year. ABC Company has a cost of capital of 16% and an income tax rate
of 40%.
Required:
Calculate the net present value (NPV) of the new equipment.