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Rayburn Corporation is considering the purchase of new machine which has expected life of five years with a standard deviation of two years. The machine will cost $40,000 and will generate the pre-tax income of $10,000 annually. The tax rate of Rayburn is 40% and its cost of capital is 7%. Rayburn will depreciate machine on straight-line basis over five years with no residual value. Compute the probability that the machine will have life of between four and seven years. Is the machine acceptable if it runs for only four years?

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  • Category:- Statistics and Probability
  • Reference No.:- M918210

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