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Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50lb.

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Drew owns and operates an onion packing plant. To help reduce costs on labor and to increase efficiency, Drew is considering purchasing an automatic 50lb. bagging machine and a machine that automatically stacks the 50lb. bags onto pallets. The cost of the two machines combined and their installation is $280,000. 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 $40,000 per year. Also, this machinery will save him approximately $20,000 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 $160,000 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. $64,000 b. $280,000 c. $224,000 d. $56,000 Enter response here (ii) What are the after-tax net returns? a. $41,250 b. $55,000 c. $26,250 d. $33,750 Enter response here a. $21,333.33 b. $5,333.33 c. $18,666.67 d. $4,666.67 Enter response here (iv) What is the after-tax terminal value? a. $160,000 b. $170,666.67 c. $170,166.67 d. $157,333.33 Enter response here (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% Enter response here (vi) What is the net present value? a.\$41,250 b. ($28,999.10) c. $(10,422.37) d. $58,035.72 Enter response here (vii) What is the least additional operating receipts that can be earned from the new machine and still be a good investment? a. $34,630 b. $25,365 c. $27,506 d. $35,695 Enter response here

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