Question
You have been hired as a financial consultant by BUBBA Corporation. BUBBA is considering investing in a new machine to produce dog biscuits. BUBBA has
You have been hired as a financial consultant by BUBBA Corporation. BUBBA is considering investing in a new machine to produce dog biscuits. BUBBA has provided you with the following information.
Base price of machine is $50,000
Machine modification cost for special use by BUBBA is $15,000.
BUBBA has a 30% average tax rate. BUBBA has a 35% marginal tax rate
The machine falls into the MACRS 3-year class
BUBBA will use the machine for 3 years and then plans sell it for $15,000 at the end of year 3.
The machine is expected to increase earnings before depreciation by $35,000 a year for the life of the machine.
BUBBA has a weighted average cost of capital of 11%.
Assume that the NPV under the above assumptions is $16,458.
Which of the following is true if the machine is expected to increase earnings by $40,000 per year instead of $35,000 per year?
The NPV will become larger and the project should be accepted
The NPV will become larger and the project should be rejected |
The NPV will become smaller and the project should be rejected |
The NPV will become smaller and the project should be accepted |
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