You have been asked by the president of your company to evaluate the proposed ac

Question

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose machine. The machine's total price including installation and delivery is $70,000. The machine falls into the four-year class using straight line depreciation method, and it will be sold after four years for $0. The use of this new machine will bring revenue of $25,000 annually for 4 years, and will have annual maintenance expense of $5,000. The firm's marginal tax rate is 40 percent and the required rate of return is 10%. (Please show your work) a. What is the initial investment? b. What is the Cash Flow at year 1? c. What is the Cash Flow at year 4? d. Is this a good investment? (hint: Compute NPV)

Explanation / Answer

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose machine. The machine's total price including installation and delivery is $70,000.a. initial investment = $70,000 a. What is the initial investment? b. What is the Cash Flow at year 1 What is the Cash Flow at year 4?b. Cash Flow at year 1 = ($25,000 - $5,000 - $70,000/4)*(1-40%) + $70,000/4 =19000 c. What is the Cash Flow at year 4? d. Is this a good investment? (hint: Compute NPV) c. the Cash Flow at year 4 = ($25,000 - $5,000 - $70,000/4)*(1-40%) + $70,000/4 =19000 d. NPV = -70,000 + 19000/1.1 +19000/1.1^2 + 19000/1.1^3 + 19000/1.1^4 =-9772.56 No, it is not a good investment

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