Your Company Is Considering a Machine That Will Cost $1,000

question 80

Multiple Choice

Your company is considering a machine that will cost $1,000 at Time 0 and which can be sold after 3 years for $100.To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 3.The machine will produce sales revenues of $900/year for 3 years; variable operating costs (excluding depreciation) will be 50 percent of sales.Operating cash inflows will begin 1 year from today (at Time 1) .The machine will have depreciation expenses of $500, $300, and $200 in Years 1, 2,
And 3, respectively.The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 10 percent required rate of return.Inflation is zero.What is the project's NPV?

• A)$6.24
• B)$7.89
• C)$8.87
• D)$9.15
• E)$10.41

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Definitions:

Price

The financial expenditure needed to acquire a good or service.

Production Function

A mathematical representation of the relationship between inputs (like labor and capital) and the maximum output possible.

Profit Maximizing

The process or strategy employed by firms to increase their profits to the highest possible level by adjusting output, pricing, or other operational decisions.

Price Of Output

The selling price of goods or services produced by a company.