Abbie Young is the manager of the customer-service division of an electrical appliance store. Abbie is considering buying a machine at a cost of $10,000 on December 31, 2019. The machine will last five years. Abbie estimates that the incremental before-tax cash savings from using the machine will be $3,000 annually. The $3,000 is measured at current prices and will be received at the end of each year. For tax purposes, she will depreciate the machine using the straight-line method, assuming no terminal disposal value. Abbie requires a 10% after-tax real rate of return (that is, the rate of return is 10% when all cash flows are denominated in December 31, 2019 dollars) Assume the annual inflation rate is 20%, and the income tax rate is 40%.

Required: 

Should the new machine be purchased using the NPV analysis?

Answer rating: 100% (QA)

Answer Cost of New Michine on 31 December 2019 is ... View the full answer