RoadRollers Paving Company Is Considering Buying a New Asphalt Laying

question 32

Essay

RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $1,300,000 and can be depreciated to zero on a straight-line basis over its life of 10 years. The machine is expected to have no salvage value. Revenues are expected to be $600,000 per year, and cost are estimated at $220,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 4% per year. The risk free rate of interest is 2% and the real interest rate is 4.0%, and given the expected inflation rate, the nominal rate is 8.16%. The firm is in the 34% tax bracket. Should the investment be undertaken?

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Definitions:

Divergent Thinking

A thought process or method used to generate creative ideas by exploring many possible solutions, often in a spontaneous, free-flowing manner.

Terman's Study

A longitudinal study conducted by Lewis Terman that began in 1921, tracking the development and characteristics of gifted children into adulthood.

IQ

Short for Intelligence Quotient, a score derived from standardized tests designed to assess human intelligence.

Concept

An abstract idea or a mental symbol typically associated with a fundamental characteristic of something.