A Corporation Is Considering Purchasing a Machine That Will Save

question 6

Essay

A corporation is considering 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 costing $150,000 will be
needed for 5 years, after which it will have a salvage value of $25,000. A straight-line depreciation with no
half-year convention applies (i.e., 20% each year). If the firm wants 15% rate of return after taxes, what is the net
present value of the cash flows generated from this machine? The firm's income tax rate is 40%.

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Definitions:

F Statistic

A ratio of variances used in the analysis of variance (ANOVA) to assess the significance of the difference between group means.

Least Squares Regression

A statistical method used to determine the line of best fit by minimizing the sum of squares of the differences between observed values and those predicted by a linear model.

P-value

The probability of obtaining test results at least as extreme as the results actually observed, under the assumption that the null hypothesis is correct.

Significant

Indicating a statistically meaningful relationship or difference in data, often determined by achieving a p-value below a predefined threshold.