Indexx, a Maker of Disease-Detection Systems Based on Biotechnology Is

Multiple Choice

Indexx, a maker of disease-detection systems based on biotechnology is considering purchasing some diagnostic equipment that costs $380,000. Shipping and installation costs will be an additional $30,000. The equipment will be depreciated based on a 3-year MACRS life. Revenues from the new equipment should be $400,000 the first year and increase 15% each year over the expected 5-year economic life. Operating expenses should be $250,000 the first year and these expenses will increase 10% each year. At the end of 5 years the equipment will be obsolete and have no salvage value. Should Indexx invest in this new equipment? Assume Indexx has a cost of capital of 15% and a marginal tax rate of 40%. Use the depreciation schedule listed below:
(3 Year Depreciation Schedule: 33.33%, 44.45%, 14.81%, 7.41%)

A) Yes, NPV = $175,573
B) Yes, NPV = $161,296
C) Yes, NPV = $456,406
D) No, NPV is negative