Tech Engineering Company Is Considering the Purchase of a New

question 149

Multiple Choice

Tech Engineering Company is considering the purchase of a new machine to replace an existing one.The old machine was purchased 5 years ago at a cost of $20,000,and it is being depreciated on a straight line basis to a zero salvage value over a 10-year life.The current market value of the old machine is $14,000.The new machine,which falls into the MACRS 5-year class,has an estimated life of 5 years,it costs $30,000,and Tech plans to sell the machine at the end of the 5th year for $1,000.The new machine is expected to generate before-tax cash savings of $3,000 per year.The company's tax rate is 40 percent.What is the IRR of the proposed project?

• A) 4.1%
• B) 2.2%
• C) 0.0%
• D) −1.5%
• E) −3.3%

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Definitions:

Excise Taxes

Taxes applied to specific goods, services, or transactions, often included in the price of products like tobacco, alcohol, and gasoline, aimed at reducing their consumption or raising revenue.

General Sales Tax

A tax imposed on sales transactions, applied to the sale of most goods and some services, and usually calculated as a percentage of the sales price.

Marginal Tax Rate

Refers to the rate at which the last dollar of income is taxed, indicating the impact of an additional dollar of income on tax liability.

Marginal Tax Rate

is the rate at which the next dollar of income will be taxed, reflecting the percentage of additional income that is paid in tax.