Question
Horizons Co.'s products are in high demand these days; as such, the firm wants to purchase a new machine to boost its productivity. After spending
Horizons Co.'s products are in high demand these days; as such, the firm wants to purchase a new machine to boost its productivity. After spending $45,000 on marketing research, New Horizons' CFO believes that buying the new machine will increase the firm's sales by 1 million dollars per year, and cost of goods sold by $0.2 million per year. Because of the new machine, New Horizons' net working capital is expected to be $100,000 higher throughout the life of the new machine. New Horizons currently has enough workers to operate the new machine; however, some of the less skilled workers need further training which will cost the firm approximately $50,000. Of course, the training can only start when the new machine is in place.
The new machine has a price of 2 million dollars and falls into a MACRS ADS 3-year class; thus, it should be depreciated at 33.33%, 44.45%, 14.81% and 7.41% in years 1 through 4, respectively. The machine has an expected life of 4 years; after that, the manufacturer of the machine offers to recycle it for free. The new machine will occupy a small room which is currently used as a storage room; as a result, New Horizons will need to rent a new storage room for $20,000 a year (after-tax).
New Horizons currently faces a 35% tax rate. The firm has common shares and bonds only, and the firm's capital structure is described in Table 2 below.
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