Lucas Company is considering investing in a new machine. The machine costs $10,000 and has an economic

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Lucas Company is considering investing in a new machine. The machine costs $10,000 and has an economic life of four years. The machine will generate cash flows of $3,000 (cash revenues less cash expenses) each year. All cash flows, except for the initial investment, are realized at the end of the year. The investment in the machine will be made at the beginning of the first year. Lucas is not subject to any taxes and, for financial accounting purposes, will depreciate the machine using straight-line depreciation over four years. Lucas uses a 10 percent cost of capital when evaluating investments.

Required
a. Suppose Lucas acquires the machine. By how much will annual accounting income increase or decrease in each of the four years? Is the sum over the four years positive?
b. Does the machine acquisition have a positive net present value?
c. Comment on the results in requirements (a) and (b).

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Fundamentals of Cost Accounting

ISBN: 978-1259565403

5th edition

Authors: William Lanen, Shannon Anderson, Michael Maher

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