Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000

question 116

Essay

Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value. Its estimated weighted-average cost of capital (WACC) for evaluating capital expenditure proposals is 10%. Note: the PV $1 factor for 10 years, 10% is 0.386; the PV annuity factor for 10%, 10 years is 6.145; and, the PV annuity factor for 10%, 5 years is 3.791.
Required:
Using a discount rate of 10%, what is the estimated net present value (NPV) of the proposed investment (rounded to the nearest thousand)?

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Definitions:

Confidence Interval

A set of values determined in such a way that a specific probability exists for a parameter's value to fall within this range.

Population Mean

The average value of a population's characteristics, calculated by summing all individual values and dividing by the number of individuals.

Confidence Level

The probability that a parameter lies within a specified range of values, often used in interval estimation to convey the reliability of an estimate.

Assignable Cause

An identifiable factor that causes a change or variation in a process or system, distinguishable from random variation.