1. You work at Wonka Industries and are considering purchasing a new piece of machinery to produce gobstoppers. The new piece of equipment costs $2,400,000. You will need to pay $100,000 to ship the machinery to your factory and will have to pay a consultant $250,000 to teach you how to properly use the machine. You estimate that the machine will result in the following changes to your sales and cost of goods sold:

Year	1	2	3	4	5
Revenue	$1,000,000	$1,500,000	$1,750,000	$2,000,000	$2,000,000
Cost of Goods	$500,000	$750,000	$1,000,000	$1,000,000	$1,000,000

Your business pays a 30% tax rate. You also require keeping 20% of next years revenues as net working capital each year. Your cost of capital (discount rate) for this project is 10% per year. You will depreciate the machine and its shipment on a straight line basis over 5 years.

a) What will the project do to you reported net income in years 1-5?

b) Should you purchase the new machine? How much wealthier (or poorer) will you be in today's dollars if you decide to go ahead and purchase the machine.

Answer rating: 100% (QA)

a Projected net income for years 15 Year 1 Revenue 1000000 COGS 500000 Gross Profit 50... View the full answer