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Karabekian Company has decided to invest in new factory machinery that will decrease labor costs by $50,000

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Karabekian Company has decided to invest in new factory machinery that will decrease labor costs by $50,000 per year. The new machinery will cost the company $200,000 and has an expected salvage value of $20,000 after nine years. The corporate tax rate is 35%, and the company’s discount rate is 12%. Compute the NPV of this investment. Should Karabekian go ahead with the investment?


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... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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The investment in the new machinery should be made The NPV of cash flows is 1767590 21767590 200000 ...View the full answer


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Accounting concepts and applications

Accounting concepts and applications

ISBN: 978-0538745482

11th Edition

Authors: Albrecht Stice, Stice Swain

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NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.

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