9 DQuestion 40The Orange Goat Company is considering the purchase of a new machine to replace an inefficientone. The machine being used for the operation has a book value and a market value of zero.However, the machine is in good working order and will last at least another 7 years. The proposedreplacement machine will perform the operation so much more efficiently that OG's engineersestimate that it will produce after-tax cash flows (labor savings) of $12,500 per year. The after-taxcost of the new machine is $75,000, and its economic life is estimated to be 7 years. It has zerosalvage value. The firm's WACC is 8%, and its marginal tax rate is 20%.Should the Orange Goat buy the new machine?No, the new machine will cannibalize the old oneYes, the machine should be discounted making the NPV positive to $5,080Yes, the labor savings create a positive value of $12,500 per yearNone of these are correct, Al and Machine Learning are taking over the worldO No, the NPV is -$9,920, which is negative, and therefore should not buy it

Net present is the defence between present value of all cash inflow and initial investment NPV = PV…

Answered: The Orange Goat Company is considering…

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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