First American Incorporated is considering buying a new copier. It will cost $9,
ID: 1172875 • Letter: F
Question
First American Incorporated is considering buying a new copier. It will cost $9,000 to purchase and S1,000 to ship and install. It has a five-year class life. At the end of four years they plan to sell the copier for $3,500. The new copier will allow FA to increase revenues by $2,000 each year but expenses will also increase by $500 each year. Account receivables will increase by S500 and account payables will increase by S800 if the copier is purchased. Straight-line depreciation will be used. FA's marginal tax rate is 34% and its cost of capital is 5%. Complete parts A through E below a) The cost basis is A: ($9,000) B: (S9,700) C: ($10,000) D: ($10,300) b) The chance in Working Capital in NICO is A: S300 B:(S300) C: (S1,300) D: $1,300 c) The Operating Cash Flow in year 2 is A: (S300) B: $1,670 C: $1,330 D: $1,500 d) The TCF is A: $3,330 B: S3,370 C: $3,030 D: S3,200 e) What should First American do about this project? A: Accept the project because the NPV is positive B: Accept the project because the NPV is negative C: Reject the project because the NPV is positive D: Reject the project because the NPV is negativeExplanation / Answer
a.
Cost Basis : (C) (10000)
b. The chance in working Capital
A: $300
c)
Operating Cashflow for year 2 = B:$1670
(d)
TCF= Terminal Cash flow = approx 3028 =(C) $3030
e) First American should reject the project because NPV is negative ($-2125)
Cost Basis Cost of the copier 9000 Add: Installation charges 1000 Total Cost Basis 10000Related Questions
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