Question:

Use the following information to answer the questions in this quiz.

Please show your work by submitting a Word, Excel, or JPEG file in the "Project 2 Drop Box".

INFORMATION OLD MACHINE:

Original Purchase Price

$ 550,000.00

Original Life

10 YEARS

Remaining Life

5 YEARS

Straight line depreciation in use

Salvage Value

$ 50,000.00

Current Fair Market Value

$ 260,000.00

INFORMATION NEW MACHINE A:

Purchase Price

$895,000.00

Estimated Life

5 YEARS

Use Straight Line Depreciation Method

Estimated Salvage Value

$ 10,000.00

Estimated Net Operating Cash Flow Increase/Decrease (Prior to Depreciation and Taxes)

End of Year 1

$ 100,000.00

End of Year 2

$ 150,000.00

End of Year 3

$ 250,000.00

End of Year 4

$ 200,000.00

End of Year 5

$ 200,000.00

ASSUMPTIONS:

Tax Rate

40%

WACC Rate

7%

If you keep the old machine, the NPV is:

A.

118,567

B.

117,653

C.

30,489

D.

300,410

40 points

QUESTION 2

If you sell the old machine and buy new machine A, the NPV will be:

10,619

-4,995

-5,859

2,907

40 points

QUESTION 3

What decision do you suggest?

A.

Keep the old machine and do not buy the new machine.

B.

Sell the old machine and buy the new machine.

10 points

QUESTION 4

List 3 risk factors that could change your answers above.