Smith Manufacturing is subject to a 45% income tax rate and a 12% hurdle rate. Management is

Question:

Smith Manufacturing is subject to a 45% income tax rate and a 12% hurdle rate. Management is considering buying a new finishing machine that is expected to cost $200,000 and reduce materials waste by $60,000 a year. The machine is expected to have a 10-year lifespan and will have a zero salvage value. For the purpose of this analysis, straight-line depreciation should be used instead of the CCA.

1. Calculate the cash flows.

2. Calculate the present value, the net present value, the internal rate of return, and the profitability index.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...