Indexx, a maker of disease-detection systems based on biotechnology is considering purchasing some diagnostic equipment that costs $380,000. Shipping and installation costs will be an additional $30,000. The equipment will be depreciated based on a 3-year MACRS life. Revenues from the new equipment should be $400,000 the first year and increase 15% each year over the expected 5-year economic life. Operating expenses should be $250,000 the first year and these expenses will increase 10% each year. At the end of 5 years the equipment will be obsolete and have no salvage value. Should Indexx invest in this new equipment? Assume Indexx has a cost of capital of 15% and a marginal tax rate of 40%. Use the depreciation schedule listed below:
(3 Year Depreciation Schedule: 33.33%, 44.45%, 14.81%, 7.41%)
A) Yes, NPV = $175,573
B) Yes, NPV = $161,296
C) Yes, NPV = $456,406
D) No, NPV is negative

Question

Quizplus · Accepted Answer

Solution: NCF₁ = (400,000 - 250,000 - 136,653)(.6) + 136,653 = $144,661 NCF₂= (460,000 - 275,000 - 182,245)(.6) + 182,245 = $183,898 NCF₃ = (529,000 - 302,500 - 60, 721)(.6) + 60,721 = $160,188 NCF₄= (608,350 - 332,750 - 30, 381)(.6) + 30,381 = $177,512 NCF₅ = (699,603 - 366,025)(.6) = $200,147 NPV = -$410,000 + $144,661(0.870) + $183,898(0.756)+ $160,188(0.658)+ $177,512(0.572) + $200,147(0.497) = $161,296

Indexx, a Maker of Disease-Detection Systems Based on Biotechnology Is