(Appendix 12A)Hamlet and Horatio Are Gravediggers

question 130

Essay

(Appendix 12A)Hamlet and Horatio are gravediggers. They are currently considering investing in a new machine to replace their outdated shovels. The new machine would cost $30,000 and have an expected useful life of five years. If Hamlet and Horatio buy the new machine, their annual cash flows would increase by $8,000. The machine's estimated terminal value is $3,000. Hamlet and Horatio assume an inflation rate of 2%, a risk-free rate of 4%, and a risk premium of 5%. Their marginal income tax rate is 20%, and they plan to use straight-line amortization for income taxes (ignore the half-year convention).
a)Calculate the net present value of the new machine using the nominal method.
b)Calculate the net present value of the new machine using the real method.

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