Assume Your Firm Will Consist of Just One Machine

question 28

Multiple Choice

Assume your firm will consist of just one machine. The machine costs $126,000 and has a physical life of 10 years. Tax laws require that it be depreciated over 7 years, using straight-line depreciation. The machine produces $50,000 a year in sales and requires cash expenses of $15,000 a year. All sales are cash sales, and your firm's marginal tax rate is 40%. Your overall cost of capital is 14% a year, and this is the appropriate rate at which to discount both the before-tax project cash flows and the cash flows to Uncle Sam. Your firm has $80,000 of debt at an interest rate of 10% a year. Your first interest payment is due in year 1. Your last interest payment and the principal on the debt are due in year 10.
-Refer to the information above. If you can assume perfect capital markets, what is the NPV of the levered ownership of the firm? Round your answer to the nearest dollar.

• A)+$14,414
• B)+$21,094
• C)-$65,586
• D)None of the above is correct.

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Definitions:

Average Age

A statistic that represents the mean age of a group of individuals or objects.

Learning by Doing

The process where productivity is increased through practice, self-perfection, and minor innovations.

Cost-Output Elasticity

A measure of how responsive the total cost of production is to changes in the quantity of output produced.

Learning Curve

A graphical representation showing how an increase in learning or experience can lead to improved efficiency and a decrease in the time required to complete a task.