You Are Reviewing Some Material That Deals with Investment Analysis

question 43

Essay

You are reviewing some material that deals with investment analysis, preparing for your first day on the job at Franklin Enterprises. Consider the cash flows that follow.
1. The immediate payment required to purchase a $600,000 milling machine.
2. Straight-line depreciation of $20,000 in year 2 of a long-term investment.
3. Annual savings in cash operating costs of $50,000 over the next eight years.
4. Sale of a machine for $35,000 at the end of its six-year service life. The machine has a book value of $25,000.
5. A $6,000 equipment overhaul in year 5 that is fully deductible for income tax purposes.
Required:
Calculate the discounted cash flow that is appropriate for each of the preceding items. Assume a 10% after-tax hurdle rate and a 30% income tax rate, and round to the nearest dollar.

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Definitions:

U.S. Dollar

The official currency of the United States of America and the world's primary reserve currency.

Currency Depreciates

Refers to a decrease in the value of a currency in comparison to other currencies, which can affect international trade and economic balance.

Government Action

Any activity or policy implemented by a government to influence economic, social, or political issues.

Devalued

Devalued is a term used to describe a reduction in the value of a currency with respect to other currencies, often through government policy.