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# CapEx_lectureeg_Student - Capital Expenditure Lecture...

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Capital Expenditure Lecture Example 1 – XYZ Company XYZ is considering the purchase of a new piece of equipment, ZZZ. (1) ZZZ will be purchased on Dec 31, 2009, and placed in service on Jan 1, 2010. It costs \$800,000, and will be fully depreciated for tax purposes over 4 years. However, it is actually expected to last for 5 years, after which time it will be sold for \$50,000. (2) ZZZ is expected to generate additional revenue of \$200,000 each year for 5 years. The tax rate is 30% and the after-tax required rate of return is 12%. As usual, assume that tax is paid in the year in which income is earned. A. Calculate the NPV of each of the components (1) and (2) above B. Given your answers to (A), determine whether or not XYZ should purchase ZZZ The following discount table excerpts may assist you: Answer: Present value of \$1.00 Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 24% 26% 1 0.9804 0.9615 0.9434 0.9259 0.9091 0.8929 0.8772 0.8621 0.8475 0.8333 0.8065 0.793 2 0.9612 0.9246 0.8900 0.8573 0.8264 0.7972 0.7695 0.7432 0.7182 0.6944 0.6504 0.629 3 0.9423 0.8890 0.8396 0.7938 0.7513 0.7118 0.6750 0.6407 0.6086 0.5787 0.5245 0.499 4 0.9238 0.8548 0.7921 0.7350 0.6830 0.6355 0.5921 0.5523 0.5158 0.4823 0.4230 0.396 5 0.9057 0.8219 0.7473 0.6806 0.6209 0.5674 0.5194 0.4761 0.4371 0.4019 0.3411 0.314 6 0.8880 0.7903 0.7050 0.6302 0.5645 0.5066 0.4556 0.4104 0.3704 0.3349 0.2751 0.249 7 0.8706 0.7599 0.6651 0.5835 0.5132 0.4523 0.3996 0.3538 0.3139 0.2791 0.2218 0.198 Present value of annuity of \$1.00

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