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A company buys amachine for $700,000 and depreciates it on a straight-line basis tozero over a five- year period for tax purposes. The investmentwould result in pre-tax cash cost savings of $190,000 per year, forfive years. At the end of 5 years, it is estimated that the machinecan be sold for $75,000. The gain on the sale of the machine wouldbe taxed at the company’s marginal corporate tax rate of 20%. Basedon the relevant cash flows, determine the Net Present Value,Internal Rate of Return and the Payback Period of the investment.Is the investment in the machine attractive in economic terms? Youcan assume that the appropriate discount rate equals 14%.
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