As of January 1, 2011, Alvarado Company wants to acquire a new machine costing $ 196,000. The machine has an estimated useful life of seven years and no salvage value. Alvarado’s tax rate is 30 percent and the depreciation is calculated uniformly. The expected pretax cash flows are as follows:
If Alvarado Company has an 11 percent cost of capital, what is the maximum price Alvarado should pay for the machine? Why? Calculate the net present value of this project. Should Alvarado buy the machine? Why? Net the cash revenues with the cash expenses.
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