Kewpie, Inc If Straight- Line Depreciation with a Salvage Value of $32,000

Essay

Kewpie, Inc. is considering purchasing a new set of packaging and labeling equipment. A comparison of estimated cash flows is shown below. $$\begin{array} { | l | l | l | l | } \hline \text { Item } & \mathrm { P } = 0.2 & \mathrm { P } = 0.15 & \mathrm { P } = 0.65 \\\hline \text { Initial investment, } \$ & 210,000 & 210,000 & 210,000 \\\hline \text { Net annual revenue, } \$ / y = a r & 265,000 & 250,000 & 240,000 \\\hline \text { Market value, } \$ & 30,000 & 32,000 & 37,000 \\\hline \text { Project life, years } & 5 & 5 & 5 \\\hline\end{array}$$ If straight- line depreciation with a salvage value of $32,000 and a useful life of 5 years is used, determine whether Kewpie should invest in the equipment on the basis of the expected value of after- tax PW. Assume an effective tax rate of 35% and a MARR of 10% per year.