A firm is trying to choose between two machines to manufacture a new line of office furniture. The financial data for each machine have been compiled as follows: Machine A Machine B Initial investment required $20,000 $12,000 Service life 6 years 3 years Salvage value $5,000 $3,000 Annual operating expenses $4,000 $2,500 Annual operating revenue $15,000 $12,500 Depreciation method 5-year MACRS 5-year MACRS The firm's marginal tax rate is 40% and uses a 15% discount rate to value the projects. Also, assume that the required service period is indefinite.
A firm is trying to choose between two machines to manufacture a new line of office furniture. The financial data for each machine have been compiled as follows: Machine A Machine B Initial investment required $20,000 $12,000 Service life 6 years 3 years Salvage value $5,000 $3,000 Annual operating expenses $4,000 $2,500 Annual operating revenue $15,000 $12,500 Depreciation method 5-year MACRS 5-year MACRS The firm's marginal tax rate is 40% and uses a 15% discount rate to value the projects. Also, assume that the required service period is indefinite.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter12: Capital Budgeting: Decision Criteria
Section: Chapter Questions
Problem 18P: Filkins Fabric Company is considering the replacement of its old, fully depreciated knitting...
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Transcribed Image Text:A firm is trying to choose between two machines to manufacture a new line of office furniture. The financial data for each machine have been compiled as follows:
Machine A
Machine B
Initial investment required
$20,000
$12,000
Service life
б уеars
3 years
Salvage value
$5,000
$3,000
Annual operating expenses
$4,000
$2,500
Annual operating revenue
$15,000
$12,500
Depreciation method
5-year MACRS
5-year MACRS
The firm's marginal tax rate is 40% and uses a 15% discount rate to value the projects. Also, assume that the required service period is indefinite.
10s.8 What is the internal rate of return (after tax) of machine A?
а. 28%
b. 39%
с. 35%
d. 43%
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