olden 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.

After-tax After tax Probabilities Net Income
Recession .3 (15000)
Normal .5 25000
Boom .2 35000

Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?

Question

olden 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. 

After-tax After tax      Probabilities 	       Net Income
Recession                       .3                          (15000)
Normal                           .5                          25000
Boom                              .2       35000

Golden's cost of capital is 14%. What is the expected NPV? Should they purchase the new equipment?

dean.shyy · Answer

N.P.V. is an acronym for NET PRESENT VALUE. With that said, the higher the NET PRESENT VALUE the better the return. To calculate NET PRESENT VALUE, go here: http://www.investopedia.com/calculator/netpresentvalue.aspx