Question

In: Accounting

ompany B considers investing in a machine that costs €120,000. The machine is expected to produce...

ompany B considers investing in a machine that costs €120,000. The machine is expected to produce revenues of €100,000 per year. The cost of materials and labor needed to generate these revenues will total €25,000 per year and other cash expenses will be €25,000 per year, for the next five years. The machine will be depreciated on a straight-line basis over five years with a zero salvage value and is estimated to be sold for €20,000 Euros at the end of year 5. Assume that the corporate tax rate is 15% and the discount rate is 10%.

What are the net cash flows of the project for years 1 to 4?

Select one:

a. 35,590

b. 22,300

c. 40,540

d. 57,890

e. 46,100

Question 12

What is the net cash flow of the project for year 5?

Select one:

a. 39,300

b. 73,490

c. 51,450

d. 57,450

e. 63,100

Question 13

Question text

What is the net income for the fourth year of the project?

Select one:

a. 22,100

b. 63,100

c. 46,100

d. 17,000

e. 26,000

Question 14

What is the payback period of the project?

Select one:

a. Between year 4 and 5

b. Between year 2 and 3

c. Between year 3 and 4

d. Cannot be estimated

e. Between year 1 and 2

Solutions

Expert Solution

Revenues €         100,000
Expenses
Material and Labor €            25,000
Other Cash Expenses €            25,000
Depreciation €            24,000
Total Expenses €            74,000
Income before taxes €            26,000
Income tax expense €              3,900
Net Income €           22,100
Add Depreciation €            24,000
Net Annual Cash Inflows €           46,100

11.
Answer is e. 46,100

12.
Answer is e. 63,100 i.e. 46100 + 20000 x (1-0.15)

13.
Answer is a. 22,100

14.
Payback Period = 120000 / 46100 = 2.60 years
Answer is b. Between year 2 and 3


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