Normal Bad Goo terge & Center " $ ~ % 9 08 98 Conditional Format as Calculation Check Cell Expla Alignment Formatting ~ Table Number X V fx Styles B D E F G H J K L M N 0 P Q R Problem 2 (12 points) Michigan Steel is contemplating the purchase of a new blast furnace. The furnace will cost $50,000 but will generate additional revenue of $30,000 per year for ten years. Additional costs, other than depreciation, will equal $18,500 per year. The furnace has an expected life of ten years, at which time it will have no salvage value. Michigan Steel uses the straight-line method of depreciation (equal amount per year) for tax purposes (e.g., $5,000 per year) Required: a) Determine the annual net after-tax cash flow of the investment if the furnace is purchased. (5 points) (3 parts) b) If Michigan's required rate of return is 12 percent and the tax rate on income is 21 percent, explain whether Michigan should purchase the furnace based on an Net Present Value (NPV) result. (5 points) Part b hint: The present value (PV) factor for an annuity at 12% and 10 years 5.65022 + c) Briefly explain what the "depreciation tax shield" refers to in a problem of this nature. (2 points) #1 #2 #3 #4 5 #6 #7 O pe here to search