Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50 lb. bagging machine and a machine that automatically stacks the 50 lb. bags onto pallets. The cost of the two machines combined and their installation is $300,000. Drew will make a 20% down payment and finance the rest of the machinery with an amortized loan over 15 years at a 5.5% interest rate. Drew predicts that by using these two machines, his plant will be able to increase output, therefore increasing operating receipts by $30,000 per year. Also, this machinery will save him approximately $10,000 in labor costs each year by the increase in efficiency. However, other operating expenses such as electricity and insurance will increase by approximately $5,000 per year. Drew assumed a straight-line depreciation over 15 years and the life of the investment is 7 years. The terminal value is $180,000 after the 7 years, and Drew requires a pretax 10% rate of return to capital. The marginal tax rate over the next 10 years is 25%.

(i) What is the initial cost for the machine?

a.$60,000 b. $300,000

c.$240,000 d.$150,000

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(ii) What are the after-tax net returns?

a.$22,500 b.$35,000

c.$26,250 d.$15,000

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(iii) What are the tax savings from depreciation?

a.$0 b.$10,000

c.$15,000 d.$5,000

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(iv) What is the after-tax terminal value?

a.$180,000 b.$300,000

c.$160,000 d.$175,000

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(v) What is the appropriate discount rate to calculate the NPV given the above information?

a.10% b.25%

c.5.5% d.7.5%

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(vi) What is the net present value?

a.$23,910.14 b.($28,999.10)

c.$28,999.10 d.$26,250

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(vii)What is the least additional operating receipts for the new machine.

a. $37,273 b. $32,089

c. $47,506 d. $45,695

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