Flerida Castillon
FIN 5310
Module 5- Comprehensive Problem
Question: The firm has a 25 percent tax rate and a 9 percent cost of capital. Should
the new equipment be purchased to replace the old equipment? Explain your answer.
According to the calculations below and the net present value of $ (3,461) of the old
equipment, yes the new equipment should be purchased. Net present value tells us that the
old equipment is not worth what the firm is paying for it anymore, therefore the replacement
by purchasing a new one is a good investment.
Solution:
Book value of old equipment
Asset Depreciation Range of years indicates the use of the 5 years MACRS schedule
Year
Depreciation Base
Percentage
Depreciation Base
Annual Depreciation
1
230000
0.200
46000
2
230000
0.320
73600
3
230000
0.192
44160
Total Depreciation to date………………………………………………..$163,760.00
