**Project Evaluation: Acquisition of Production Machine**Riverview Company is assessing the potential acquisition of a new production machine. The machine's financial details are outlined below:- **Base Price:** $200,000- **Installation Costs:** $28,000- **Net Working Capital:** An additional $10,000 is required at installation.- **Depreciation:** The machine will be depreciated over 3 years using simplified straight line depreciation.- **Operating Cost Savings:** The machine will save the firm $110,000 annually.- **End of Life Value:** The machine is planned to be operational for 5 years and can be sold for $20,000 at the end of this period.- **Financial Metrics:** - **Cost of Capital:** 12% - **Tax Rate:** 34%**Internal Rate of Return (IRR) Calculation:**The problem asks to determine the IRR of the project. The options provided are:- 14.1%- 31.3%- 9.5%- **28.2%** (Correct Answer)- 19.7%This IRR value helps in understanding the profitability and feasibility of the project, comparing it against the cost of capital to decide whether the project should be pursued.

The IRR is the investment discount rate that corresponds to the difference between the original…

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the IRR of the project? O 14.1% 31.3% 9.5% 28.2% O 19.7%

Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%. What is the IRR of the project? O 14.1% 31.3% 9.5% 28.2% O 19.7%

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

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