Chapter 10, Problem 13PROB

Summary Introduction

Net present value:

Net present value is the difference between the present values of cash inflows minus present value of cash outflows.

Calculate the cost of retained earnings are as follows:

$\text{Net present value}=\text{Present value of cash inflows}-\text{Initial investment}$

Decision rule:

$\begin{array}{l}\text{NPV}>\text{0 Accept the project}\\ \text{NPV}<\text{0 Reject the project}\end{array}$

EC is considering to replace an asset with new one which has cost of $37,500 and old machine has book value of $8,300. Asset is classified under three years MACRS class and can be sold after three years for 6,000. Savings from the machine is $14,300. Life of the project is 3 years, tax rate is 40% and required rate of return is 11%.