Question: It costs $ 7 9 , 0 0 0 to purchase and install a new machine that will let the company cut costs for 5

It costs $

79, 000

to purchase and install a new machine that will let the company cut costs for

5

years. The machine will be depreciated linearly to zero over

10

years, and can be sold for $

11, 850

after

5

years.

Every year starting right now, the project requires an investment of $

5, 000

for net working capital. After

5

years, the stock of net working capital will be recouped.

The marginal tax rate is

35 %

and the required return is

15 % .

Attempt

3 / 6

for

8

pts

.

Part

1

What is the after

-

tax salvage value of the machine in year

5 ?

16402

Correct

Annual depreciation:

=

0 / 10

= 79, 000 / 10

= 7, 900

Book value in year

5

5 =

0 -

*

= 79, 000 - 5 * 7, 900

= 39, 500

After

-

tax salvage value in year

5

ATSV

=

-

(

-

)

= 11, 850 - 0.35 (11, 850 - 39, 500)

= 21, 528

Attempt

2 / 6

for

8

pts

.

Part

2

What is the present value of operating cash flows

(

EBIT

(1 -

) +

Dep.

)

to break even?

0 +

decimals

Attempt

3 / 6

for

10

pts

.

Part

3

At what level of annual operating cash flows

(

OCF

)

does the project break even?

0 +

decimals

Attempt

2 / 6

for

10

pts

.

Part

4

At what level of annual cost savings does the project break even?

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