Terra Corp is considering the purchase of a machine that is expected to cost $180,000. The machine will require an additional $40,000 to have it shipped, modified, and installed. The purchase of this machine is expected to require additional working capital of $20,000 upfront, which will be liquidated when the machine is sold off. Terra expects to use the machine for 4 years, and then sell it for $95,000. The machine will be fully depreciated over the four years, at a constant rate. In each of the four years, Terra’s revenues are expected to be $85,000 higher than they would be without the machine. Annual operating costs (not including depreciation) will also be higher, however, to the extent of $19,000. The firm pays a 30% rate in taxes, and its cost of capital is 7.5%. The initial outflow of cash for the proposed project is expected to be:
Terra Corp is considering the purchase of a machine that is expected to cost $180,000. The machine will require an additional $40,000 to have it shipped, modified, and installed. The purchase of this machine is expected to require additional working capital of $20,000 upfront, which will be liquidated when the machine is sold off. Terra expects to use the machine for 4 years, and then sell it for $95,000. The machine will be fully depreciated over the four years, at a constant rate. In each of the four years, Terra’s revenues are expected to be $85,000 higher than they would be without the machine. Annual operating costs (not including depreciation) will also be higher, however, to the extent of $19,000. The firm pays a 30% rate in taxes, and its cost of capital is 7.5%. The initial outflow of cash for the proposed project is expected to be:
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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Information for Terra Corp. Terra Corp is considering the purchase of a machine that is expected to cost $180,000. The machine will require an additional $40,000 to have it shipped, modified, and installed. The purchase of this machine is expected to require additional working capital of $20,000 upfront, which will be liquidated when the machine is sold off. Terra expects to use the machine for 4 years, and then sell it for $95,000. The machine will be fully depreciated over the four years, at a constant rate. In each of the four years, Terra’s revenues are expected to be $85,000 higher than they would be without the machine. Annual operating costs (not including depreciation) will also be higher, however, to the extent of $19,000. The firm pays a 30% rate in taxes, and its cost of capital is 7.5%. The initial outflow of cash for the proposed project is expected to be:
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$220,000
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$200,000
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$180,000
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$190,000
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$240,000
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