Question
In: Finance
2. Smith Corp. is considering whether to expand widget production. This would require the purchase of...
2. Smith Corp. is considering whether to expand widget production. This would require the purchase of a new widget-producing machine at a cost of $5,400,000. The machine would produce 450,000 widgets per year during its useful life of three years, and would be depreciated for tax purposes at a rate of $1,800,000 per year. The machine would have a salvage value of $500,000. Expanding widget production would also require the use of a building that could otherwise be leased for $500,000 per year. Working capital would be 12% of the next year’s sales. Widget prices are $20 and are expected to remain stable. The materials and labor required to produce a widget cost $12, and these costs are also expected to remain stable. The tax rate is 30%. The discount rate is 8% per year.
(a) Compute the incremental free cash flow resulting from the purchase of a widget machine on a year-by-year basis.
(b) What is the NPV of the widget machine?
Solutions
jeff jeffy answered 1 year agoRelated Solutions
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