Marian runs a store selling decorative breathing masks. For obvious reasons, she has recently seen a...

Marian runs a store selling decorative breathing masks. For obvious reasons, she has recently seen a sharp uptick in business and wants to increase her production capacity. To accomplish this, she wants to buy a new industrial sewing machine, which will allow her to increase her yearly EBIT by $15,000 per year for the next 4 years. The sewing machine costs $36,000, but if she makes this purchase, she will borrow $28,000 for 4 years at 6.5% to help pay the purchase price. Her tax rate is 36%, and her cost of levered equity is 15%.

1: What is the NPV of buying the new sewing machine if Marian pays cash? (10 points)

1: Using the FTE method, what is the NPV of buying the new sewing machine if Marian takes out the loan? (15 points)

Expert Solution

NPV of buying New sewing machine if it purchase out of cash =$17,103 whereas NPV if machine is bought out of Loan is $21,792 it means Marian enjoys the benefit of leverage in case he bought machine out of Loan .

jeff jeffy answered 1 year ago

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Marian runs a store selling decorative breathing masks. For obvious reasons, she has recently seen a...

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