Golden Corporation Is Considering the Purchase of New Equipment Costing

question 17

Essay

Golden Corporation is considering the purchase of new equipment costing $200,000. The expected life of the equipment is 10 years. It is expected that the new equipment can generate an increase in net income of $35,000 per year for the next 10 years. The probabilities for the increase in net income depend on the state of the economy. $\begin{array}{lcr}\text { Aftertax }&\text { Aftertax Probabilities}&\text { Net Income}\\\text { Recession } & .3 & (\$ 15,000) \\\text { Normal } & .5 & 25,000 \\\text { Boom } & .2 & 35,000\end{array}$ The equipment can be amortized using straight-line amortization for tax purposes. Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?

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Definitions:

Frederick Herzberg

A psychologist best known for developing the Motivation-Hygiene Theory which distinguishes between motivators that increase job satisfaction and hygiene factors that can prevent dissatisfaction.

Good Job

A commendation for work or tasks that have been performed well, often reflecting satisfaction with the effort or outcomes.

High Performance

Achieving significantly better outcomes or results than average, often through exceptional efficiency, productivity, or quality.

Opportunity to Perform

A situation or condition that gives an individual or group the chance to carry out a task or activity, often leading to skill development or achievement recognition.