Mars IncIs Considering the Purchase of a New Machine Which Will

question 25

Multiple Choice

Mars Inc.is considering the purchase of a new machine which will reduce manufacturing costs by R5,000 annually.Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for R10,000.The firm expects to be able to reduce net working capital by R15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years.Mars' marginal tax rate is 40 percent, and it uses a 12 percent required rate of return to evaluate projects of this nature.If the machine costs R60,000, what is the NPV of the project?

• A) -R15,394
• B) -R14,093
• C) -R58,512
• D) -R21,493
• E) -R46,901

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Definitions:

Tax

Tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Producer Surplus

The difference between what producers are willing to accept for a good or service and the actual price they receive.

Tax

A required financial contribution or alternative type of tax enforced on a taxpayer by a governing body to support government expenditure and assorted public outlays.

Tax Revenue

Money earned by governments through taxation, intended for the financing of public amenities and meeting governmental commitments.