The manager of the Incredibly Edible Deli is considering purchasing a 20-gallon gold-plated espresso machine to make

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The manager of the Incredibly Edible Deli is considering purchasing a 20-gallon gold-plated espresso machine to make coffee for the deli. The espresso machine will cost $25,000 and will have a life of 10 years and no salvage value. The deli uses straight-line depreciation and has a tax rate of 40%. The owners’ required rate of return on the investment in the espresso machine is 26%, the cost of debt is 10%, and the company maintains a market value leverage ratio of 0.5.

Required:

1. Calculate the weighted average cost of capital, k,, associated with the investment.

2. Calculate the minimum annual after-tax operating cash flow that the espresso machine would have to generate to make the investment acceptable.

3. Assume the annual before-tax cash expense (4E,) associated with the answer to question 2 above is $2,400. Calculate the minimum annual beforetax cash revenues (AR,) the espresso machine would have to generate to make its purchase acceptable.

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