Question
You are considering an investment in a new machine. The firms tax rate is 30%, the risk free rate is 2% and the discount rate
You are considering an investment in a new machine. The firm’s tax rate is 30%, the risk free rate is 2% and the discount rate is 9%. Answer this question in Excel. Please highlight or circle your answers. The machine is expected to have the following:
Year | Incremental Revenue | Incremental Expenses | Incremental Depreciation | Incremental Change in Net Working Capital | Incremental Capital Spending |
0 | 0 | 0 | 0 | +20,000 | +100,000 |
1 | +20,000 | +5,000 | +15,000 | +2,000 | 0 |
2 | +20,000 | +5,000 | +15,000 | +2,000 | 0 |
3 | +20,000 | +5,000 | +15,000 | -5,000 | -15,000 |
4 | +30,000 | +5,000 | +20,000 | +2,000 | 0 |
5 | +30,000 | +6,000 | +20,000 | -21,000 | -20,000 |
- Questions
- What is the expected incremental cash flow each year for this new machine?
- Should you approve this project? Why or why not?
Step by Step Solution
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There are 3 Steps involved in it
Step: 1
To calculate the expected incremental cash flow each year for this new machine we need to compute th...
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Fundamentals of Financial Management
Authors: Eugene F. Brigham, Joel F. Houston
12th edition
978-0324597714, 324597711, 324597703, 978-8131518571, 8131518574, 978-0324597707
