Question
First American Incorporated is considering buying a new copier. It will cost $9,000 to purchase and $1,000 to ship and install. It has a five-year
First American Incorporated is considering buying a new copier. It will cost $9,000 to purchase and $1,000 to ship and install. It has a five-year class life. At the end of four years they plan to sell the copier for $3,500. The new copier will allow FA to increase revenues by $2,000 each year but expenses will also increase by $500 each year. Account receivables will increase by $500 and account payables will increase by $800 if the copier is purchased. Straight-line depreciation will be used. FAs marginal tax rate is 34% and its cost of capital is 5%. Complete parts A through E below.
a) The cost basis is A: ($9,000) B: ($9,700) C: ($10,000) D: ($10,300)
b) The chance in Working Capital in NICO is A: $300 B:($300) C: ($1,300) D: $1,300
c) The Operating Cash Flow in year 2 is A: ($300) B: $1,670 C: $1,330 D: $1,500
d) The TCF is A: $3,330 B: $3,370 C: $3,030 D: $3,200
e) What should First American do about this project? A: Accept the project because the NPV is positive B: Accept the project because the NPV is negative C: Reject the project because the NPV is positive D: Reject the project because the NPV is negative
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