Company A is assessing the purchase of a machine. With the machine, the firm can generate...

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Company A is assessing the purchase of a machine. With the machine, the firm can generate a series of cash inflows as follows. Starting next year, there will be four cash flows, $200,000 each, once every two years. Then, it switches to annual cash flows with a constant annual growth rate of 5% in the next eight years. All the cash inflows are estimated based on comparable prices. The cost of the machine is $1 million, which can be depreciated straight-line to a zero book value in five years. The firm's tax rate is 20%, and its (nominal) cost of capital is 12%. The inflation rate is expected to be 2% per year. What is the net present value of this project? Company A is assessing the purchase of a machine. With the machine, the firm can generate a series of cash inflows as follows. Starting next year, there will be four cash flows, $200,000 each, once every two years. Then, it switches to annual cash flows with a constant annual growth rate of 5% in the next eight years. All the cash inflows are estimated based on comparable prices. The cost of the machine is $1 million, which can be depreciated straight-line to a zero book value in five years. The firm's tax rate is 20%, and its (nominal) cost of capital is 12%. The inflation rate is expected to be 2% per year. What is the net present value of this project?

Answer rating: 100% (QA)

The net present value of the project is 1000000 ... View the full answer