1.A machine is purchased for $50,000. Its annual maintenance costs are $1000. Every 4years the machine requires a complete overhaul at a cost of $4,000. The machine has a lifespan of20 years with a salvage value at that time of $10,000.a) Create a cash flow diagram for the machine lifespan costs.b) What additional information might be useful in determining if the should purchasethis machine?c) Of the factors you have identified as important (part (b)) what are the most critical (top twoperhaps) that should be further investigated/resolved?company

Solution- (a)- Cash Flow Diagram-

Answered: 1. A machine is purchased for $50,000.…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Information for Terra Corp. Terra Corp is considering the purchase of a machine that is expected to cost $180,000. The machine will require an additional $40,000 to have it shipped, modified, and installed. The purchase of this machine is expected to require additional working capital of $20,000 upfront, which will be liquidated when the machine is sold off. Terra expects to use the machine for 4 years, and then sell it for $95,000. The machine will be fully depreciated over the four years, at a constant rate. In each of the four years, Terra’s revenues are expected to be $85,000 higher than they would be without the machine. Annual operating costs (not including depreciation) will also be higher, however, to the extent of $19,000. The firm pays a 30% rate in taxes, and its cost of capital is 7.5% rate of return or return on investment on this project is estimated to be: 12.92% 7.72% 7.41% 13.11% 10.07%
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