Capital Budgeting
First American Incorporated is considering buying a new copier. It will cost $9,000 to purchase and $1,000 to ship and install. It has a five year class life. At the end of four years they plan to sell the copier for $3,500. The new copier will allow FA to increase revenues by $2,000 each year but expenses will also increase by $500 each year. Account receivables will increase by $500 and account payables will increase by $800 if the copier is purchased.
Straight-line depreciation will be used. FA’s marginal tax rate is 34% and its cost of capital is 5%. Should FA purchase the new copier?
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