Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A company is evaluating the purchase of a machine to improve product quality and output levels. The new machine would cost $811,000 and would
A company is evaluating the purchase of a machine to improve product quality and output levels. The new machine would cost $811,000 and would be depreciated for tax purposes using the straight-line method over an estimated six-year life to its expected salvage value of $50,000. The new machine would require an addition of $45,000 to working capital at the beginning of the project, which will of course be returned to the firm at the end of the project. The machine would increase the company's annual pre-tax cash receipts by $247,000 from their current level. Cash operating costs pertaining to the machine will be $17,000 per year. In addition, at the end of the 4th year, a major repair of the machine costing $30,000 (pre- tax) would be required. The company has an overall cost of capital of 11%, and is in the 35% marginal tax bracket. Required: A. Prepare a cash flow spreadsheet that identifies and summarizes the incremental cash flows for each year of the machine's life. B. Calculate the machine's net present value. C. Calculate the machine's internal rate of return. D. Based on your analysis, should the firm purchase the machine?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started