Your Company Is Deciding When to Invest in a New

question 78

Multiple Choice

Your company is deciding when to invest in a new machine.The new machine will increase cash flow by $240,000 per year.You believe the technology used in the machine has a 10-year life; in other words,no matter when you purchase the machine,it will be obsolete 10 years from today.The machine is currently priced at $1,200,000.The cost of the machine will decline by $120,000 per year until it reaches $720,000,where it will remain.Your required return is 8 percent.In which year should you purchase the machine?

• A)Year 0
• B)Year 1
• C)Year 2
• D)Year 3
• E)Year 4

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Definitions:

Mean-Variance Efficient Portfolio

An investment portfolio optimized for the highest expected return for a given level of risk, based on modern portfolio theory.

Covariances

A measure of how two securities move in relation to each other, indicating the degree to which their returns are interconnected.

Investments

The act of allocating resources, usually money, with the expectation of generating an income or profit.

Single Index Model

A simplified financial model that describes the return of a security as a linear function of the return of a single market index, plus some random noise.