Equivalent annual cost: Your company decided to purchase a machine. Now, the business needs to decide which model to purchase. Two different models, with different characteristics will meet the needs of your business. The purchase cost of machine A is $200,000. The operating cost for the machine (before tax) is $75,000 per year. The machine's expected useful life is 8 years with no salvage value at the end of its useful life. The purchase cost of machine B is $100,000. The operating cost for the machine (before tax) is $60,000 per year. The machine's expected useful life is 6 years with no salvage value at the end of its useful life. Neither machine will impact revenue. There is no change in net working capital. The required return for the project is 10%. The CCA rate for the machines is 20%. The company's marginal income tax rate is 35%. This question uses the half-year rule. Calculate the NPV for each machine using the six step approach (nearest dollar without dollar sign ($) or comma, e.g. 15000) Negative cash flow is -15000): What is the NPV for machine A?
Equivalent annual cost: Your company decided to purchase a machine. Now, the business needs to decide which model to purchase. Two different models, with different characteristics will meet the needs of your business. The purchase cost of machine A is $200,000. The operating cost for the machine (before tax) is $75,000 per year. The machine's expected useful life is 8 years with no salvage value at the end of its useful life. The purchase cost of machine B is $100,000. The operating cost for the machine (before tax) is $60,000 per year. The machine's expected useful life is 6 years with no salvage value at the end of its useful life. Neither machine will impact revenue. There is no change in net working capital. The required return for the project is 10%. The CCA rate for the machines is 20%. The company's marginal income tax rate is 35%. This question uses the half-year rule. Calculate the NPV for each machine using the six step approach (nearest dollar without dollar sign ($) or comma, e.g. 15000) Negative cash flow is -15000): What is the NPV for machine A?
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
Related questions
Question
MACHINE A, NOT MACHINE B.
Transcribed Image Text:Equivalent annual cost: Your company decided to purchase a machine. Now, the business needs to decide which model to purchase. Two different models,
with different characteristics will meet the needs of your business.
The purchase cost of machine A is $200,000. The operating cost for the machine (before tax) is $75,000 per year. The machine's expected useful life is 8 years
with no salvage value at the end of its useful life.
The purchase cost of machine B is $100,000. The operating cost for the machine (before tax) is $60,000 per year. The machine's expected useful life is 6 years
with no salvage value at the end of its useful life.
Neither machine will impact revenue. There is no change in net working capital. The required return for the project is 10%. The CCA rate for the machines is
20%. The company's marginal income tax rate is 35%.
This question uses the half-year rule.
Calculate the NPV for each machine using the six step approach (nearest dollar without dollar sign ($) or comma, e.g. 15000) Negative cash flow is -15000):
What is the NPV for machine A?
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