You have been asked to make a recommendation about whether to spend $115,000 on a new Laser cutting machine for your company. Annual net revenues in Current/Actual dollars are estimated to be $25,000 in the first year, increasing by $460 per year for each year thereafter. Salvage value is estimated to be $6,000 in Real dollars in 18 years. Taking into account the following information: • Your company uses a Real-MARR of 8% for all its projects. Inflation is expected to average 1.2% per year for at least the next 18 years. There will be an equipment overhaul cost in Real dollars of $2,000 in BOTH year 6 and year 8.

You have been asked to make a recommendation about whether to spend $115,000 on a new Laser cutting machine for your company. Annual net revenues in Current/Actual dollars are estimated to be $25,000 in the first year, increasing by $460 per year for each year thereafter. Salvage value is estimated to be $6,000 in Real dollars in 18 years. Taking into account the following information: • Your company uses a Real-MARR of 8% for all its projects. Inflation is expected to average 1.2% per year for at least the next 18 years. There will be an equipment overhaul cost in Real dollars of $2,000 in BOTH year 6 and year 8.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 3P

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