Ms Thompson, as the CFO of a clock maker, is considering an investment of a $420,000 machine
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Question:
Ms Thompson, as the CFO of a clock maker, is considering an investment of a $420,000 machine that has a seven year life and no salvage value. The machine is depreciated by a straight line method with zero salvage value over the seven years. The appropriate discount rate of cash flows of projectis 13%, and the corporate tax rate of the company is 35%. Evaluate the profitability of the project under the following scenario;
| Pessimistic | Expected | Optimistic | |
| Unit sales | 23,000 | 25,000 | 27,000 |
| price | $38 | $40 | $42 |
| Variable Costs | $21 | $20 | $19 |
| Fixed Costs | $320,000 | $300,000 | $280,000 |
Expert Answer:
pessimistic Time line 0 1 2 3 4 5 6 7 Equipment cost 420000 Initial Investment outlay 420000 Sales of new club line No of unitsselling price variable ... View the full answer
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