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Use the following information to answer the questions in this quiz.
Please show your work by submitting a Word, Excel, or JPEG file in the "Project 2 Drop Box".
| INFORMATION OLD MACHINE: | | |
| | | | |
| Original Purchase Price | | $ 550,000.00 | |
| Original Life | | 10 YEARS | |
| Remaining Life | | 5 YEARS | |
| Straight line depreciation in use | | |
| Salvage Value | | $ 50,000.00 | |
| Current Fair Market Value | | $ 260,000.00 | |
| | | | |
| | | | |
| INFORMATION NEW MACHINE A: | | |
| | | | |
| Purchase Price | | $895,000.00 | |
| Estimated Life | | 5 YEARS | |
| Use Straight Line Depreciation Method | | |
| Estimated Salvage Value | | $ 10,000.00 | |
| | | | |
| | | | |
| Estimated Net Operating Cash Flow Increase/Decrease (Prior to Depreciation and Taxes) |
| | | |
| End of Year 1 | | $ 100,000.00 |
| End of Year 2 | | $ 150,000.00 |
| End of Year 3 | | $ 250,000.00 |
| End of Year 4 | | $ 200,000.00 |
| End of Year 5 | | $ 200,000.00 |
| | | |
| ASSUMPTIONS: | | |
| Tax Rate | | 40% |
| WACC Rate | | 7% |
If you keep the old machine, the NPV is:
| | A. | 118,567 |
| | B. | 117,653 |
| | C. | 30,489 |
| | D. | 300,410 |
40 points
Question 2
If you sell the old machine and buy new machine A, the NPV will be:
| | | 10,619 |
| | | -4,995 |
| | | -5,859 |
| | | 2,907 |
40 points
Question 3
What decision do you suggest?
| | A. | Keep the old machine and do not buy the new machine. |
| | B. | Sell the old machine and buy the new machine. |
10 points
Question 4
The cash flow creating the least amount of risk or the cash flow we should be certain of is
| | A. | The cost of the new machine. |
| | B. | The projected cash flow saving in year 4. |
| | C. | The tax benefit from depreciation |
| | D. | The salvage value on the new machine. |
Answer & Explanation
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