Creighton Industries Is Considering the Purchase of a New Strapping

question 55

Multiple Choice

Creighton Industries is considering the purchase of a new strapping machine,which will cost $150,000,plus an additional $10,500 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years.The machine is expected to have a salvage value of $20,000.Creighton's income tax rate is 35%.Creighton uses a 12.5% discount rate for capital budgeting purposes.What is the machine's NPV?

• A) $29,888
• B) $25,062
• C) $22,153
• D) $27,894

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Definitions:

Cost of Equity

The return a company requires to decide if an investment meets capital return requirements, often used in capital budgeting to evaluate potential investments.

After-tax Cost

The cost of an investment or expense after deducting the tax advantages, reflecting the actual financial impact on an individual or company.

Coupon Bonds

Bonds that pay the holder a fixed interest rate (the coupon) over a specified period, typically until maturity when the principal, or face value, is repaid.

Market Yield

The rate of return anticipated on a bond if it is held until the maturity date, factoring in its current price, interest payments, and term length.