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2. BB Co. is considering the purchase of a new machine. The new machine has an expected useful and depreciable life of two years, costs $100,000, has an expected salvage value of $15,000 for depreciation purposes and an expected market value of $15,000 in two years. The new machine requires an additional $10,000 in working capital today, which is fully recoverable at the end of the project. The new machine is expected to increase revenues by $40,000 and reduce costs by $20,000 per year for the next two years. The company uses straight-line depreciation for all of its assets, has a required rate of return equal to 10%, and a marginal tax rate of 20%. What is the Net Present Value of the project? (20 points) NM useful life = 2 years NM depreciable life = 2 years NM Cost = 100,000 NM SV for depreciation in 2 years = 15,000 NM expected mkt. value in 2 years = 15,000 Increased Revenues 40,000 per year for 2 years Reduced Costs 20,000 per year for 2 years Increased Working Capital today = 10,000 Required rate of return = 10% Marginal tax rate = 20% 2. BB Co. is considering the purchase of a new machine. The new machine has an expected useful and depreciable life of two years, costs $100,000, has an expected salvage value of $15,000 for depreciation purposes and an expected market value of $15,000 in two years. The new machine requires an additional $10,000 in working capital today, which is fully recoverable at the end of the project. The new machine is expected to increase revenues by $40,000 and reduce costs by $20,000 per year for the next two years. The company uses straight-line depreciation for all of its assets, has a required rate of return equal to 10%, and a marginal tax rate of 20%. What is the Net Present Value of the project? (20 points) NM useful life = 2 years NM depreciable life = 2 years NM Cost = 100,000 NM SV for depreciation in 2 years = 15,000 NM expected mkt. value in 2 years = 15,000 Increased Revenues 40,000 per year for 2 years Reduced Costs 20,000 per year for 2 years Increased Working Capital today = 10,000 Required rate of return = 10% Marginal tax rate = 20%

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