A manufacturing company is considering acquiring a new injection-molding machine ata cost of $150,000. Because of a rapid change inproduct mix, the need for this particular machine isexpected to last only eight years, after which timethe machine is expected to have a salvage value of$10,000. The annual operating cost is estimatedto be $11,000. The addition of the machine to thecurrent production facility is expected to generatean annual revenue of $48,000. The firm has only$100,000 available from its equity funds, so it mustborrow the additional $50,000 required at an interest rate of 10% per year with repayment of principal and interest in eight equal annual amounts. Theapplicable marginal income tax rate for the firm is40%. Assume that the asset qualifies for a sevenyear MACRS property class.(a) Determine the after-tax cash flows.(b) Determine the NPW of this project atMARR = 14%.
A manufacturing company is considering acquiring a new injection-molding machine at
a cost of $150,000. Because of a rapid change in
product mix, the need for this particular machine is
expected to last only eight years, after which time
the machine is expected to have a salvage value of
$10,000. The annual operating cost is estimated
to be $11,000. The addition of the machine to the
current production facility is expected to generate
an annual revenue of $48,000. The firm has only
$100,000 available from its equity funds, so it must
borrow the additional $50,000 required at an interest rate of 10% per year with repayment of principal and interest in eight equal annual amounts. The
applicable marginal income tax rate for the firm is
40%. Assume that the asset qualifies for a sevenyear MACRS property class.
(a) Determine the after-tax cash flows.
(b) Determine the NPW of this project at
MARR = 14%.
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