Answered: You arc interested in purchasing a…

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 17P: The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will...

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You arc interested in purchasing a machine that will save $200,000 per year
before taxes. The cost of operating the machine, including maintenance, is $80,000 per year. The machine, which costs $150,000, will be needed for five years after which it will have a salvage value of $25,000. The machine would qualify for a 7-year MACRS property. What is the net present value of the cash flows generated from this machine at 15%? The firm's income tax rate is 40%.

Expert Solution

Introduction:

Net present value (NPV) is the difference between the present values of cash inflows and cash outflows. As per NPV rule, a project with positive NPV will be accepted and the project with negative NPV should be rejected.

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