PDF CorpNeeds to Replace an Old Lathe with a New,more Efficient

question 88

Multiple Choice

PDF Corp.needs to replace an old lathe with a new,more efficient model.The old lathe was purchased for $50,000 nine years ago and has a current book value of $5,000.(The old machine is being depreciated on a straight-line basis over a ten-year useful life.) The new lathe costs $100,000.It will cost the company $10,000 to get the new lathe to the factory and get it installed.The old machine will be sold as scrap metal for $2,000.The new machine is also being depreciated on a straight-line basis over ten years.Sales are expected to increase by $8,000 per year while operating expenses are expected to decrease by $12,000 per year.PDF's marginal tax rate is 40%.Additional working capital of $3,000 is required to maintain the new machine and higher sales level.The new lathe is expected to be sold for $5,000 at the end of the project's ten-year life.What is the project's terminal cash flow?

• A) $3,000
• B) $5,000
• C) $6,000
• D) $8,000

---

Definitions:

Refunding

In finance, refunding refers to the process where an entity replaces an existing debt obligation with a new debt obligation under different terms, typically to take advantage of more favorable interest rates.

High-Coupon Debt

Bonds that offer higher interest payments due to having a high coupon rate, typically reflecting higher risk or longer maturity.

Interest Payments

Regular payments made to bondholders, representing the interest earned on the bond's face value for a certain period.

Reinvestment Rate

The rate of return available to investors when they reinvest the earnings from an investment during the life of that investment.