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Q1) Interco Machinery, Inc. is estimating acquistion of a new production machine.This machine will cost= $200,000, delivered, and will result in annual increase in earnings before interest and tax of $50,000. This machine has expected life of 10 years with no salvage value. Depreciation is assumed to be straight-line 10 years. To be operated properly this machine will need the after tax expenditure of $5,000 to install and another $5,000 after tax for Operator training session. Due to it efficiency, this machine will also need the increase of $20,000 in inventory. Company projects of this rish class need rate of return of 10%. Companys marginal tax rate is 34%, and expenditure will need borrowing of $100,000 from bank at 8% interest rate - resulting in additional interest payments of $8,000 per year.

1. Compute the projects initial outlay?

2. Determine the projects annual after tax cash flows for years 1-9?

3. Determine the projects terminal cash flow in year 10 (terminal + regular)?

4. find out the projects NPV?

5. Should the project be accepted? describe why or why Not?

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M919858

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