1. Your firm is considering buying a machine for $10,000. The machine will produce annual cost savings of $3000 for the next five years. The machine will be depreciated over the 5 year period using the accelerated depreciation percentages allowed in the US (20%, 32%, 19.2%, 11.52%, 11.52%, 5.76% for each of the years 1,2,,6). At the end of the sixth year, the machine will be sold for a salvage value of $4000. If the WACC is 12% and the tax rate is 35%, should this machine be bought?

2. Machines J and K have the following investment and operating costs:

Year 0 1 2 3

J 10000 1100 1200

K 12000 1100 1200 1300

Which machine is a better buy at a WACC of 10%?

3. Revenues generated by New Link product are forecast as follows: year 1: $40,000, year 2: $30,000, year 3: $20,000, year 4: $10,000. Expenses are expected to be 40% of revenues and working capital required in each year is expected to be 20% of revenues for the following year. The product requires an immediate investment of $45,000 in plant and equipment

1. What is the initial investment in the product? Remember working capital
2. If the plant and equipment are depreciated to a salvage value of zero using straight line depreciation and the firms tax rate is 40%, what are the project cash flows in each year?
3. If the opportunity cost of capital is 12%, what is project NPV, IRR, and MIRR?