The ICantBelieveWhatsHappening Company needs to decide whether or not to purchase a new piece of...
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The ICantBelieveWhatsHappening Company needs to decide whether or not to purchase a new piece of equipment. The equipment costs $5.2 million (payable now). The equipment will provide before-tax cash inflows of $2.0 million a year at the end of each of the next four years. The equipment would be categorized as a 3-year tax class asset according to the MACRS system. Therefore use the following depreciation rates: 33%, 45%, 15%, and 7%, for each year respectively from year 1 through 4.
At the end of four years, the company expects to be able to sell the equipment for a salvage value of $ 40,000 (after-tax). The company is in the 21% tax bracket. The company has an after-tax cost of capital of 10%.
a) Show the initial cash outflow, operating cash flows, and terminal cash flow.
b) What is the Net Present Value (NPV) of this project? Show work from the required
calculator.
c) What is the Internal Rate of Return (IRR)? Show work from the required calculator.
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