Wary Corporation is considering the purchase of a new machine for $180,000. If the new machine is purchased, Wary Corporation will sell existing equipment with a book value of $8,500 for total proceeds of $5,500. An additional $10,000 in working capital will be required for the new machine. Management predicts that the new machine can produce cash sales of $130,000 each year for the next 3 years. The firm uses the straight-line method of depreciation with mid-year convention for tax purposes. The machine is considered a 3-year property. The company expects to sell the new machine for $24,000 (before tax) at the end of year 3. The working capital investment will not be recovered at the end of year 3. Wary 's tax rate is 40%. Management requires a minimum of 12% return on all investments.

Required:

A. What is the net initial investment?

B. What is the before tax gain or loss on disposal of the equipment at the end of year 3?

Answer:______________________ gain / loss (circle one)

C. What are the relevant after-tax cash flows for the years 1-3? (Round to the nearest dollar)

D. What is the net present value of the investment? (Round to the nearest dollar)

E. State your recommendation to the management of the company (Accept / Reject).

Period Present Value of $1 Due at the End of n Periods (PVIF), PVIF(i,n). 4% 5% 7% 8% 9% 10% 11% 0.926 0.917 0.909 0.857 0.842 0.826 12% 13% 14% 15% 0.901 0.893 0.885 0.877 0.870 0.812 0.797 0.783 0.769 0.756 0.731 0.712 0.693 0.675 0.658 0.794 0.772 0.751 0.923 0.853 0.789 0.731 0.914 0.837 0.766 0.703 0.905 0.820 0.744 0.676 0.896 0.804 0.722 10 1% 2% 3% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.585 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.879 0.773 0.681 0.601 0.530 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.2 0.180 0.153 0.130 0.111 0.095 0.081 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 11 0.650 0.527 0.475 12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 13 0.469 0.415 14 15 16 17 18 19 20 0.820 0.673 0.554 0.456 123456789