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Maize Company is considering purchasing a new machine as a capital investment. The details of the new machine are summarized below: The cost of the machine will be $400,000. The machine has a useful life of five (5) years. The cost of the machine will be depreciated on a straight-line basis to a terminal disposal value of zero. The investment requires working capital of $30,000 upon purchase of the new machine. This working capital is expected to be fully recovered at the end of the project. The annual cost savings if the new machine is acquired will be $95,000. The machine’s salvage value at the end of five years is expected to be $15,000. Maize pays taxes at

Maize Company is considering purchasing a new machine as a capital investment. The details of the new machine are summarized below: The cost of the machine will be $400,000. The machine has a useful life of five (5) years. The cost of the machine will be depreciated on a straight-line basis to a terminal disposal value of zero. The investment requires working capital of $30,000 upon purchase of the new machine. This working capital is expected to be fully recovered at the end of the project. The annual cost savings if the new machine is acquired will be $95,000. The machine’s salvage value at the end of five years is expected to be $15,000. Maize pays taxes at

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Maize Company is considering purchasing a new machine as a capital investment. The details of the new machine are summarized below:

  • The cost of the machine will be $400,000.
  • The machine has a useful life of five (5) years.
  • The cost of the machine will be depreciated on a straight-line basis to a terminal disposal value of zero.
  • The investment requires working capital of $30,000 upon purchase of the new machine. This working capital is expected to be fully recovered at the end of the project.
  • The annual cost savings if the new machine is acquired will be $95,000.
  • The machine’s salvage value at the end of five years is expected to be $15,000.
  • Maize pays taxes at a rate of 35%.
  • Maize has a required rate of return of 8%. a. Calculate the net present value (NPV) of the project (round your solution to dollars).

 

  1. Calculate the net present value (NPV) of the project (round your solution to dollars).
  2. What is the payback period of the project (round your solution to two decimal places)?
  3. Should the project be accepted or rejected? Why?
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