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As part of your internship, you have been asked to estimate cash flows for project...

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Finance

As part of your internship, you have been asked to estimate cash flows for project evaluation purposes of your division for next year. There is a specialized piece of equipment that is needed in your division. A brand-new version of this equipment would cost $50,000 or more today. Fortunately, your company has a used piece of equipment that will work just as well. This piece of equipment was originally bought for $45,000 but has by now been depreciated down to a zero-book value. If not used in your division, the equipment can be sold for an after-tax cash flow of $25,000. At what value should the second-hand piece of equipment be included in your cash-flow estimate (round to $00)?

A. The value of $45,000 is correct as this will recoup the money originally spent.

B. The NPV of next-best use is a cash outflow of $25,000.

C. If used, the equipment must be replaced, thus, $50,000 is appropriate.

D. None of the above.

E. As its book value is zero, it should be included at zero value.

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