1. You work at Wonka Industries and are considering purchasing a new piece of machinery...
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1. You work at Wonka Industries and are considering purchasing a new piece of machinery to produce gobstoppers. The new piece of equipment costs $2,400,000. You will need to pay $100,000 to ship the machinery to your factory and will have to pay a consultant $250,000 to teach you how to properly use the machine. You estimate that the machine will result in the following changes to your sales and cost of goods sold:
Cost of Goods $500,000 $750,000 $1,000,000 $1,000,000 $1,000,000
Your business pays a 30% tax rate. You also require keeping 20% of next years revenues as net working capital each year. Your cost of capital (discount rate) for this project is 10% per year. You will depreciate the machine and its shipment on a straight line basis over 5 years.
a. What will the project do to you reported net income in years 1-5?
b. Should you purchase the new machine? How much wealthier (or poorer) will you be in todays dollars if you decide to go ahead and purchase the machine.
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