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Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will depreciate the machine on the straight-line basis for four years, even though it has a 15% chance that it may last for five years. The tax rate of Benton is 40%, and the proper discount rate is 12%. Find the maximum price that Benton should pay for this machine to make it a profitable investment

Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will depreciate the machine on the straight-line basis for four years, even though it has a 15% chance that it may last for five years. The tax rate of Benton is 40%, and the proper discount rate is 12%. Find the maximum price that Benton should pay for this machine to make it a profitable investment

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 2P
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Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will depreciate the machine on the straight-line basis for four years, even though it has a 15% chance that it may last for five years. The tax rate of Benton is 40%, and the proper discount rate is 12%. Find the maximum price that Benton should pay for this machine to make it a profitable investment.

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