The Charleston Textile Company is considering acquiring a new knitting machine at a cost of $200,000. Because of a rapid change in fashion styles, the need for this particular machine is expected to last only five years, after which the machine is expected to have a salvage value of $50,000. The annual operating cost is estimated at $ 10,000. The addition of this machine to the current production facility is expected to generate an additional revenue of $90,000 annually and will be depreciated in the seven-year MACRS property class. The income tax rate applicable to Charleston is 36%. The initial investment will be financed with 60% equity and 40% debt. The before-tax debt interest rate, which combines both short-term and long-term financing, is 12% with the loan to be repaid in equal annual installments. The equity interest rate (ie), which combines the two sources of common and preferred stocks, is 18%.
(a) Evaluate this investment project by using net equity flows.
(b) Evaluate this investment project by using k.