Axa Is Replacing an Old, Fully Depreciated Extractor with a More

question 102

Multiple Choice

Axa is replacing an old, fully depreciated extractor with a more efficient machine that will cost $265,000. The new extractor will be depreciated as a 7-year MACRS asset. With the more efficient production, Axa expects annual revenues to increase by $80,000, and annual operating expenses to increase by $25,000. If Axa expects to sell the machine at the beginning of year 6 for $40,000, determine the NPV of this project. Assume the firm's marginal tax rate is 40% and that the firm's cost of capital is 10%. Use the depreciation schedule listed below:
(7-Yr Dep. Schedule: 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, 4.46%)

• A) -$46,283
• B) -$42,855
• C) -$40,773
• D) -$38,105

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Definitions:

Gross Demands

The total quantity of goods or services demanded across all consumers in the market before accounting for net effects such as substitution or income changes.

Initial Endowment

The initial distribution of wealth, goods, or resources that individuals or firms possess in an economic model.

Leisure

A period of free time not taken up by work, during which an individual can relax, enjoy hobbies, or engage in other activities that they find pleasurable.

Normal Good

A good for which demand increases as the income of individuals increases, all other factors being constant.