Ecogen Is Considering the Purchase of Some New Equipment That

question 18

Multiple Choice

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?

• A) Yes, NPV = $2,090
• B) Yes, NPV = $12,390
• C) No, NPV = -$63,210
• D) No, NPV = -$12,210

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Definitions:

Incubation

A process in creativity and problem-solving where an individual refrains from consciously thinking about a problem, allowing for subconscious processing.

Morphological Analysis

A method used to break down and examine the structure and form of complex systems, problems, or concepts.

Improve Creativity

Strategies or practices aimed at increasing one's ability to generate novel and useful ideas.

Exploring Problem

The process of investigating, understanding, and defining a problem before attempting to solve it, often involving gathering information and identifying underlying causes.