Use the following information to answer questions 11 – 15. First American is considering buying a...

Use the following information to answer questions 11 – 15. First American is considering buying a new machine to increase production. It will cost $3,000. Shipping will be $300. It has a three-year class life. At the end of one year they plan to sell the machine for $2,000. The new machine will allow FA to increase revenues by $1,800 each year but expenses will increase by $400 each year. If the new machine is purchased, inventory will decrease by $1,000 and accounts payable will increase by 350. Straight-line depreciation will be used. FA’s marginal tax rate is 34% and its cost of capital is 7%.

What is the OCF for year 1?

a) $1,111

b) $561

c) $1,298

d) $1,950

Expert Solution

The following are the data inputs in spreadsheet:

The following are the obtained results in spreadsheet:

jeff jeffy answered 2 years ago

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