B) WWE CORP. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line depreciation method being used and that this machine is being depreciated down to zero, the marginal tax rate is 34%, and a required rate of return of 15%. (i) Solve for the value of the initial outlay associated with this project. (ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9. (iii) Solve for the value of terminal cash flow in year 10 (annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project). (iv) Solve for the value to show whether this machine should be purchase or not.
B) WWE CORP. needs to replace an old machine with a new, more efficient model. The new machine being considered will result in an increase in earnings before interest and taxes of $70,000 per year. The purchase price is $200,000, and it would cost an additional $10,000 to properly install the machine. In addition, to properly operate the machine, inventory must be increased by $10,000. This machine has an expected life of 10 years, with no salvage value. Assume that a straight-line
(i) Solve for the value of the initial outlay associated with this project.
(ii) Solve for the value of annual after-tax cash flows for this project from years 1 through 9.
(iii) Solve for the value of terminal cash flow in year 10 (annual after-tax cash flow in year 10 plus any additional cash flows associated with the termination of the project).
(iv) Solve for the value to show whether this machine should be purchase or not.
Step by step
Solved in 3 steps with 2 images
