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For each question, one of the question answer options is correct. If you do it correctly, you will get one of the specific answers under each problem.

Capital Budgeting Data

The following information is needed to answer questions 19-23. Gadot Gear is an Israeli company that produces unique weapons disguised as accessories. Based on the results of a $10,000 market study, Gadot Gear is considering selling overseas and increasing revenues by an estimated $330,000 per year. The engineering designs for the new machine have just been completed at a cost of $10,000 and will be used as a guideline to the installation if the project is approved. To sell the additional $330,000 of their special, custom accessories, Gadot Gear will incur two new costs. First, Gadot Gear will need to replace the old machine. Second, Gadot Gear will need to hire some part-time sales representatives and spend more on raw materials and labor. These additional expenses will be $120,000 per year.

The old machine has a $70,000 market value if sold today, a $40,000 book value, and is being depreciated straight line to a zero-book value over the next two years. If Gadot Gear doesn't expand overseas, this old machine will do an adequate job for 5 more years and then could be sold for $20.000.

The new, higher-capacity machine will cost $500,000. Additionally, Gadot Gear will pay a sales tax of 10% and a delivery and installation fee of $50,000. The new machine will be depreciated on a straight-line basis over 5 years to its estimated salvage value of $100,000. If sales increase, Gadot Gear will need to invest $31,000 in working capital which will be fully recovered at the end of the 5-year project. Gadot Gear has a 13% cost of capital and a corporate tax rate of 30%.

19. What is the total net initial outlay at time zero if Gadot Gear purchases the new machinery?

O A. $570,000

O B. $581,000

O C. $631,000

O D. $636,000

O E. $641,000

20. What is the operating cash flow in year 2 if Gadot Gear purchases the new machinery?

O A. $117,000

O B. $171,000

O C. $177,000

O D. $217,000

O E. $240,000

21. What is the operating cash flow in year 5 (including all terminal values) if Gadot

Gear purchases the new machinery?

O A. $277,000

O B. $294,000

O C. $308,000

O D. $322,000

O E. $328,000

22. Using a 13% cost of capital, what is the NPV for Gadot Gear to purchase the new machinery?

O A. $62,651.48

0 B. $102,642.87

O C. $105,804.66

O D. $106,044.23

O E. $113,642.87

23. What is the IRR for Gadot Gear to purchase the new machinery?

O A, 20.21%

O B. 19.79%

O C. 19.74%

O D. 19.41%

O E. 16.68%