Gramling Inc. is considering an investment in new operating equipment with a 15-year life. The new equipment will cost $300,000 and a one-time cost of $15,000 will be incurred to remove the old equipment and install the new equipment. The old equipment that will be replaced originally cost $200,000 and has a current book value of $25,000. This old equipment will be sold for $8,000. The new equipment will be depreciated uniformly over its useful life. At the end of 15 years, this equipment will be removed and given to the local recycling center. The new equipment is expected to generate cash profits of $83,000 per year. Gramling uses an 11 percent hurdle rate (its market rate of interest) to evaluate long-term projects and is subject to a 30 percent tax rate.
A. Should Gramling invest in this equipment?
B. Assuming that Gramling does invest in the equipment, which of the following financing options would be best, a 10-year noninterest-bearing note (annual compounding) or a 10-year monthly installment note?
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