Dexter Smith & Co

question 36

Multiple Choice

Dexter Smith & Co.is replacing a machine simply because it has worn out.The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life.The firm has a 34 percent tax rate,uses straight-line depreciation over an asset's life,and has a positive net income.Given this,which one of the following statements is correct?

• A)As a project, the new machine has a net present value equal to minus one times the machine's purchase price.
• B)The new machine will have a zero rate of return.
• C)The new machine will generate positive operating cash flows, at least in the first few years of its life.
• D)The new machine will create a cash outflow when the firm disposes of it at the end of its life.
• E)The new machine creates erosion effects.

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Definitions:

Profit Sharing

A form of compensation whereby a percentage of company profits is distributed to the employees whose work helped generate them.