The firm Arboretum is considering an investment in equipment to produce a new product. The cost of the equipment is $150,000. The equipment will be depreciated on a straight line basis over 5 years to a salvage value of 0. Arboretum expects to use the equipment for three years and then to sell it for $60,000. For the three years of operation, the equipment will generate revenues of $40,000 per year and will have an operating cost of $3,000 per year. Assuming the opportunity cost of capital for Arboretum is 12% and its tax rate is 35%,
(a) Should Arboretum purchase the equipment?
(b) Does the decision change if the annual revenues that the equipment will generate are $80,000?
(c) Does the decision change if the annual revenues that the equipment will generate are $20,000?
(d) If the opportunity cost of capital for Arboretum is 30% percent should Arboretum purchase the equipment?
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