A Company Can Buy a Machine That Is Expected to Have

question 45

Essay

A company can buy a machine that is expected to have a three-year life and a $30,000 salvage value. It will be depreciated using the straight-line method. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax net income to be received at the end of each year. If a table of present values of $1 at 12% shows values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net present value of the cash flows from the investment, discounted at 12%?

---

Definitions:

Controllable Margin

The portion of income that can be directly controlled or influenced by management decisions, often excluding fixed costs.

Operating Assets

Assets used in the day-to-day operations of a business, contributing to its ability to generate income.

Contribution Margin

The amount remaining from sales revenue after variable production costs have been deducted, contributing to covering fixed costs.

Controllable Margin

The portion of operating income that can be directly controlled or influenced by managers at certain levels of an organization.