Question

Use the following information to answer the questions in this quiz.

Please show your work by submitting a Word, Excel, or JPEG file in the "Project 2 Drop Box".

INFORMATION OLD MACHINE:
Original Purchase Price		$     550,000.00
Original Life		10 YEARS
Remaining Life		5 YEARS
Straight line depreciation in use
Salvage Value		$      50,000.00
Current Fair Market Value		$     260,000.00
INFORMATION NEW MACHINE A:
Purchase Price		$895,000.00
Estimated Life		5 YEARS
Use Straight Line Depreciation Method
Estimated Salvage Value		$      10,000.00
Estimated Net Operating Cash Flow Increase/Decrease (Prior to Depreciation and Taxes)
End of Year 1		$     100,000.00
End of Year 2		$     150,000.00
End of Year 3		$     250,000.00
End of Year 4		$     200,000.00
End of Year 5		$     200,000.00
ASSUMPTIONS:
Tax Rate		40%
WACC Rate		7%

If you keep the old machine, the NPV is:

	A.	118,567
	B.	117,653
	C.	30,489
	D.	300,410

40 points

Question 2

If you sell the old machine and buy new machine A, the NPV will be:

		10,619
		-4,995
		-5,859
		2,907

40 points

Question 3

What decision do you suggest?

	A.	Keep the old machine and do not buy the new machine.
	B.	Sell the old machine and buy the new machine.

10 points

Question 4

The cash flow creating the least amount of risk or the cash flow we should be certain of is

	A.	The cost of the new machine.
	B.	The projected cash flow saving in year 4.
	C.	The tax benefit from depreciation
	D.	The salvage value on the new machine.

Answer 1