Mideque, Inc., is considering a project to produce pens. Assume that this is a replacement project. The old equipment can be sold for $10,501 as of today. It was bought five years ago for $22,863 and is assumed to last for five more years with no salvage value at the end of its life. The initial cost of the new equipment, including transportation, installation, and so forth, will be $ 23,781.
Mideque also estimates that this new equipment will save the company $2,524 per year in operating costs and increase the revenues (sales) by $1,437 per year over the five-year life of the project. Mideque will finance $9,121 by loan with an interest rate of 14 percent per year. The loan will be repaid at the rate of $1,620 per year plus interest on the remaining balance each year. Mideque uses straight-line depreciation, and the new equipment will have no salvage value at the end of its 5-year life. Assume a corporate-profits tax rate of 49 percent a capital-gain tax rate of 44 percent. Compute the initial investment. Get Finance homework help today