Delta Inc. is considering the purchase of a new machine which is expected to inc

Question

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent.
1 .The machine's incremental after-tax cash inflow for year 1 is:
A) $6,420.
B) $7,980.
C) $8,620.
D) $5,980.
2 .The machine's after-tax incremental cash flow in year five is:
A) $6,980.
B) $5,980.
C) $7,120.
D) $8,620
3. The machine's NPV is:
A) $1,556.56.
B) $2,556.56.
C) $1,123.99.
D) $2,123.99

Explanation / Answer

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent.
1 .The machine's incremental after-tax cash inflow for year 1 is:
A) $6,420.

2 .The machine's after-tax incremental cash flow in year five is:

C) $7,120.

3. The machine's NPV is:
A) $1,556.56.

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