Question
In: Finance
Your firm is considering purchasing a machine that has an expected eight-year life and will generate...
Your firm is considering purchasing a machine that has an expected eight-year life and will generate for the firm $10,500 per year in net operating income before taxes. The firm has a 21% marginal tax. Given the associated project risks, the required return for this project is 14% p.a. The CFO has decided that the machine will be depreciated to its anticipated salvage value of $8,000. The machine costs $55,000. As the CEO you need to decide whether to purchase the machine.
Solutions
Expert Solution
Operating cash flow (OCF) each year = income after tax + depreciation
Depreciation each year = (cost of machine - salvage value) / useful life
In year 8, the salvage value of the machine equals its book value, hence no tax adjustment is required.
NPV is calculated using NPV function in Excel
NPV is -$7,993
It is advised not to purchase the machine, as the NPV is negative
jeff jeffy answered 2 years agoRelated Solutions
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