The Katrina Corp Is Considering the Purchase of a New

question 31

Essay

The Katrina Corp is considering the purchase of a new machine that produces hurricane proof windows in January 2010.The window machine will cost $300,000 and Katrina's management expects it to last 6 years.At the end of six years the new machine is expected to have a zero book value but could be sold for $25,000.Depreciation each year on the window machine will be $50,000 and Katrina's tax rate is 30%.The Pretax cash flows expected from the machine are as follows:
Required:
(A.)Calculate the net present of the new machine if the cost of capital is 15%.
(B.)Indicate whether or not Katrina should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

---

Definitions:

Fit for Particular Purpose(s)

A legal concept that implies a sold item is suitable for the specific use intended by the buyer, which the seller is aware of.

Adequately Contained

A condition in which something is sufficiently controlled or held to prevent harm or spread.

Labeled

The action of attaching identification, instructions, or contents information to a product or item.

Express Warranty

A guarantee explicitly stated by a seller regarding the condition, functionality, or performance of a product.