3 DHSH coffee company is considering the purchase of a new top-of-the-line espresso machine. The cost of the espresso machine is $50,000. This machine will be depreciated over 4 years, with schedule given as follows (note that depreciation is expressed in nominal terms): Year. Depreciation Expense 0. $0 1. $16,670 2. $22,220 3 $7,405 4. $3,705 Last year, DHSH completed a $5,000 study of espresso-drinking habits. From the results of this study, DHSH determined that the machine is capable of earning revenues of $40,000 per year (in real terms), starting one year from now, while operating costs will be $15,000 per year (also in real terms). The machine will last for four years, after which its salvage value will be zero. Assume the tax rate is 34%. If the nominal required rate of return for DHSH is 10% and inflation is 3%, calculate the NPV of the investment in
3 DHSH coffee company is considering the purchase of a new top-of-the-line espresso machine. The cost of the espresso machine is $50,000. This machine will be depreciated over 4 years, with schedule given as follows (note that depreciation is expressed in nominal terms): Year. Depreciation Expense 0. $0 1. $16,670 2. $22,220 3 $7,405 4. $3,705 Last year, DHSH completed a $5,000 study of espresso-drinking habits. From the results of this study, DHSH determined that the machine is capable of earning revenues of $40,000 per year (in real terms), starting one year from now, while operating costs will be $15,000 per year (also in real terms). The machine will last for four years, after which its salvage value will be zero. Assume the tax rate is 34%. If the nominal required rate of return for DHSH is 10% and inflation is 3%, calculate the NPV of the investment in
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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M3
DHSH coffee company is considering the purchase of a new top-of-the-line espresso machine. The cost of the espresso machine is $50,000. This machine will be depreciated over 4 years, with schedule given as follows (note that depreciation is expressed in nominal terms):
Year. Depreciation Expense
0. $0
1. $16,670
2. $22,220
3 $7,405
4. $3,705
Last year, DHSH completed a $5,000 study of espresso-drinking habits. From the results of this study, DHSH determined that the machine is capable of earning revenues of $40,000 per year (in real terms), starting one year from now, while operating costs will be $15,000 per year (also in real terms). The machine will last for four years, after which its salvage value will be zero. Assume the tax rate is 34%. If the nominal required rate of return for DHSH is 10% and inflation is 3%, calculate the NPV of the investment in the espresso machine.
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