a) Based on the NPV rule, should the company accept the project? b) Based on the IRR rule, should the company accept the project? c) Build a one-way data table to examine how sensitive is the NPV to changes in the market value at the end of year 5. The data table should range from $1,000 to $6,000 in increments of $1.000

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
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QUESTION 1
A company is considering buying a machine for $11,000. If purchased, the
machine will produce annual cost savings of $3,000 for the next 5 years.
The machine will be depreciated over 5 years using the 5-year MACRS
schedule. At the end of the 5th year, the machine will be sold for $4,000.
However, there is uncertainty about the future market value. The firm's tax
rate is 35% and its discount rate is 12%.
a) Based on the NPV rule, should the company accept the project?
b) Based on the IRR rule, should the company accept the project?
c) Build a one-way data table to examine how sensitive is the NPV to
changes in the market value at the end of year 5. The data table should
range from $1,000 to $6,000 in increments of $1,000.
Transcribed Image Text:QUESTION 1 A company is considering buying a machine for $11,000. If purchased, the machine will produce annual cost savings of $3,000 for the next 5 years. The machine will be depreciated over 5 years using the 5-year MACRS schedule. At the end of the 5th year, the machine will be sold for $4,000. However, there is uncertainty about the future market value. The firm's tax rate is 35% and its discount rate is 12%. a) Based on the NPV rule, should the company accept the project? b) Based on the IRR rule, should the company accept the project? c) Build a one-way data table to examine how sensitive is the NPV to changes in the market value at the end of year 5. The data table should range from $1,000 to $6,000 in increments of $1,000.
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