A paving company is considering buying a new machine. The machine costs $1,300,000 and can be depreciated to zero on a straight-line basis over its life of 10 years. The machine is expected to have no salvage value. Revenues are expected to be $600,000 per year and costs are estimated at $220,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 4% per year. The risk-free rate is 2% and the real interest rate is 4% and given the expected inflation rate, the nominal rate is 8.16%. The firm is in the 34% bracket. Should the investment be undertaken?

Answer rating: 100% (QA)

Step 11 Yes the investment should be undertaken To determine this we can use the net present value N... View the full answer