Question
Eastern Inc. is considering one of the two machines available to produce garden tools. The Artic1 costs $360,000, has a four-year life and has to
Eastern Inc. is considering one of the two machines available to produce garden tools. The Artic1 costs $360,000, has a four-year life and has to be depreciated on a straight-line method to zero. In order to operate Artic 1, it requires an initial working capital of $9,000. This working capital will be recovered at the end of the life of the asset. It is estimated that the Artic1 will generate a revenue of $150,000 in the first year, and the revenue will increase by 2.5% per year for its remaining life. Its pretax operating cost is $40,000 per year. At the end of the fourth year, Artic1 can be sold of $28,000.
The other machine Eastern considering is TelestoneII. It costs $480,000, has a five-year life and has to be depreciated on a straight-line method to zero salvage value. It requires an initial working capital of $7,000. At the end of the fifth year the entire working capital will be recouped. It is estimated that TelestoneII will generate an annual revenue $175,000. Its pretax operating cost is $58,000. At the end of the fifth year, the machine will be sold for $41,500. The tax rate of Eastern is 35%, and the discount rate is 12%. Which do you prefer? Why?
1) Correct net investment of Artic1.
2) Correct net cash flow of Artic1 for each year.
3) Correct NPV of Artic1.
4) Correct net investment of TelestoneII.
5) Correct net cash flow of TelestoneII for each year.
6) Correct NPV of TelestoneII.
Which one do you prefer? Why?
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