Magen's Bakery, Inc., is considering the purchase of a new cake mixing equipment for $200,000. This would
Question:
This machine has an expected life of 10 years, after which it would have no salvage value. Finally, to purchase the new machine, it appears that the firm would have to borrow $80,000 at 10 percent interest from its local bank, resulting in additional interest payments of $8,000 per year. Assume the use of the simplified straight-line method to depreciate this machine down to zero, a 34 percent marginal tax rate, and a required rate of return of 12 percent.
i) What is the initial cash outlay associated with this project?
ii) What are the annual net cash flows associated with this project for Years 1 through 9?
iii) What is the terminal cash flow in Year 10?
iv) Should this machine be purchased?
Financial Management Principles and Applications
ISBN: 978-0133423822
12th edition
Authors: Sheridan Titman, Arthur Keown, John Martin