Your Company Is Considering a Machine Which Will Cost $50,000

question 84

Multiple Choice

Your company is considering a machine which will cost $50,000 at Time 0 and which can be sold after 3 years for $10,000.$12,000 must be invested at Time 0 in inventories and receivables;these funds will be recovered when the operation is closed at the end of Year 3.The facility will produce sales revenues of $50,000/year for 3 years;variable operating costs (excluding depreciation) will be 40 percent of sales.No fixed costs will be incurred.Operating cash inflows will begin 1 year from today (at t = 1) .By an act of Congress,the machine will have depreciation expenses of $40,000,$5,000,and $5,000 in Years 1,2,and 3,respectively.The company has a 40 percent tax rate,enough taxable income from other assets to enable it to get a tax refund on this project if the project's income is negative,and a 15 percent required rate of return.Inflation is zero.What is the project's NPV?

• A) $7,673.71
• B) $12,851.75
• C) $17,436.84
• D) $24,989.67
• E) $32,784.25

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Definitions:

Ordinary Loss

A loss incurred in the normal operation of a business that can be used to offset other types of income for tax purposes.

Interest Income

Earnings from investment in interest-bearing financial instruments, such as savings accounts, CDs, or bonds.

FMV

Fair Market Value (FMV) is the estimated price that an asset would sell for on the open market between a willing buyer and a willing seller.

Basis

The initial cost of an asset, adjusted for factors such as depreciation or improvements, used to calculate capital gains or losses for tax purposes.