Cannon Company wants to expand its business and is evaluating whether to add a new machine to support the expansion. The machine will cost $300,000 to purchase and install. Adding the machine will increase Cannon Company’s annual revenues by $99,000 for the next four years; operating costs, excluding depreciation, will not change if the machine is purchased. In four years, Cannon Company expects to be able to sell the machine for $12,000. The machine will be depreciated according to the MACRS 3-year class of assets. Cannon Company’s marginal tax rate is 20 percent, and its required rate of return is 12 percent. Should CannonCompany purchase the machine? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
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Cannon Company wants to expand its business and is evaluating whether to add a new machine to support the expansion. The machine will cost $300,000 to purchase and install. Adding the machine will increase Cannon Company’s annual revenues by $99,000 for the next four years; operating costs, excluding depreciation, will not change if the machine is purchased. In four years, Cannon Company expects to be able to sell the machine for $12,000. The machine will be depreciated according to the MACRS 3-year class of assets. Cannon Company’s marginal tax rate is 20 percent, and its required rate of return is 12 percent. Should CannonCompany purchase the machine? Why? 

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