Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 22, Problem 26P

a.

Summary Introduction

To determine: The net present value (NPV) of investing today.

Introduction:

Net present value (NPV):

The net present value (NPV) is the distinction between the present value of cash inflow and the present value of cash outflow for a specified period of time. NPV is used to analyze the profits of a particular investment or project. Basically, the difference between the present value of cash outflow and present value of cash inflow is termed as net present value.

b.

Summary Introduction

To determine: The net present value (NPV) of waiting and investing tomorrow.

c.

Summary Introduction

To verify: The hurdle rate rule of the thumb gives the correct time to invest if the annual cash flow is $80,000.

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Replacement Analysis The Everly Equipment Company's flange-lipping machine was purchased 5 years ago for $75,000. It had an expected life of 10 years when it was bought and its remaining depreciation is $7,500 per year for each year of its remaining life. As older flange-lippers are robust and useful machines, this one can be sold for $20,000 at the end of its useful life. A new high-efficiency digital-controlled flange-lipper can be purchased for $130,000, including installation costs. During its 5-year life, it will reduce cash operating expenses by $45,000 per year, although it will not affect sales. At the end of its useful life, the high-efficiency machine is estimated to be worthless. MACRS depreciation will be used, and the machine will be depreciated over its 3-year class life rather than its 5-year economic life, so the applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The old machine can be sold today for $50,000. The firm's tax rate is 25%, and the…

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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book

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