Question
Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100. To operate
Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100. To operate the machine, $205 must be invested at Time 0 in inventories; $200 of these funds will be recovered when the machine is retired at the end of Year 3. The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation) will be 50 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2, and 3, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent required rate of return. Inflation is zero. What is the project's NPV?
a. | $6.24 | |
b. | $9.15 | |
c. | $10.41 | |
d. | $7.89 | |
e. | $2.89 |
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