any, whose earnings put them in the 46% tax bracket, is considering purchasing a piece of equipment for $25,000. The equipment has a straight line depreciation (=25000/4 per year), a useful life of 4 years and a salvage value of $5000 (taxes already deducted, you don't have to calc that). It is estimated that the equipment will increase the company's earnings by $8000 for each of the 4 years. Should the equipment be purchased? Use an interest rate of 10%

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Q: Multiple Choice

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Q: Need help with this Question

A: Step 1:

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.