O\'Dell Enterprises manufactures lenses for telescopes. O\'Dell is considering r

Question

O'Dell Enterprises manufactures lenses for telescopes. O'Dell is considering replacing a machine that grinds lenses and has received a proposal from a vendor for the new lens grinder. O'Dell has a 12 percent cost of capital and a 30 percent tax rate. The vendor will sell the company a new machine for $310,000 and buy the old machine, which has a $20,000 book value, for $30,000. The new machine is expected to generate $80,000 of pretax cash inflows, and the company calculates depreciation expense uni- formly over its five-year life P12.3

Explanation / Answer

Working:

As the net present value is negative, the proposal should not be accepted.

Years 0 1-5 Initial investment -280000 Annual after tax cash flows 74600 Net cash flows -280000 74600 Cost of capital 12% 12% PV factor 1 3.6048 Present Value -280000 268918.1 Net Present Value -11082

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.