Startle Corporation wants to purchase a new production machine. They currently h
ID: 2587049 • Letter: S
Question
Startle Corporation wants to purchase a new production machine. They currently have an old machine, which is operable for five more years and is expected to have a zero-disposal value at the end of five years. If the company buys the new machine, the old machine will be sold now for $65,000 (book value is $73,000). The new machine will cost $600,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. The new machine will not have a salvage value and will not be sold after its useful life. An additional cash investment in working capital of $50,000 will be required if the new machine is purchased. The investment is expected to generate $75,000 in before tax cash net inflows during the first year of operation. The expected before tax cash net inflow for years two through five is $220,000 each year. These cash flows do not include depreciation and are recognized at the end of each year. The working capital investment will not be recovered at the end of the asset's life. The company’s tax rate is 30%.
5. What is the net initial investment?
a. $650,000
b. $585,000
c. $574,600
d. $715,000
e. $717,400
f. $582,600
g. $647,600
h. None of the above
6. Ignore your answer to the previous question and assume that the net initial investment is $590,000. What is the net present value of the investment, assuming the required rate of return is 10%? (Round to the nearest dollar)
a. $21,613
b. $93,046
c. $31,774
d. $59,997
e. $37,977
f. $112,155
g. $69,819
h. None of the above
Explanation / Answer
5. Answer: Option b. $585,000
6. Answer: Option e. $37,977
Net initial investment: Cost of new machine $ 600000 Additional working capital 50000 Less: Salvage value of old machine -65000 Net initial investment $ 585000Related Questions
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