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Tennessee Co. is considering the production ofan exterior paint that will require the purchase of new mixing machinery. The machinery will cost$700,000, is expected to have a useful life of 12 years, and is expected to have a salvage value of$100,000 at the end of 12 years. The machinery will also need a $40,000 overhaul at the end of Year 7.A $50,000 increase in working capital will be needed for this investment project. The working capitalwill be released at the end of the 12 years. The new paint is expected to generate net cash inflows of$120,000 per year for each of the 12 years. Tennessee's discount rate is 14%.

Required:

a. What is the net present value of this investment opportunity?

b. Based on your answer to (a) above, should Tennessee go ahead with the new paint?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M946124

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