Pierce Company Is Considering the Purchase of New Equipment That

question 149

Essay

Pierce Company is considering the purchase of new equipment that will cost $150,000.The equipment will save the company $48,000 per year in cash operating costs.The equipment has an estimated useful life of five years and no expected salvage value.The company's cost of capital is 12%.
Required:
1)Assuming the company is subject to a 40% tax rate,compute the net present value.
2)Compute the amount of the annual depreciation tax shield provided by the new equipment.
3)Should the equipment be purchased? Why or why not?

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