Capital Budgeting and Time Value of Money: Part I: Market Rate: 10%. Company X will get a
Question:
Capital Budgeting and Time Value of Money:
Part I:
Market Rate: 10%. Company X will get a machine that costs $4,000 today. Machine has a lifetime of 4 years and will depreciate straight-line to zero at the end of its life with no salvage value.
Tax rate is 20%. The cash flow that the machine will create has the following details:
Revenue Per Year = Price*Quantity
Cost Per Year = Variable Cost*Quantity + Fixed Cost
where Price is equal to 6, Variable Cost is equal to 1, Quantity is equal to 1,600 units, and fixed cost is $500.
Company thinks the current Net Working Capital does not need to be increased in the face of the increased activity.
What is the payback period and discounted payback period? (Clearly calculate the cash flow corresponding to years 0,1,2,3, and 4. )
Part II:
Without solving for the financial break-even quantity, can you tell whether it is greater or less than 1,600? Explain with a few sentences.
Intermediate Accounting
ISBN: 978-0324300987
10th Edition
Authors: Loren A Nikolai, D. Bazley and Jefferson P. Jones