2. The ABC company is considering purchasing a machine that costs $280,000 and e

Question

2. The ABC company is considering purchasing a machine that costs $280,000 and expected to yield $200,000 per year before taxes. The company has to borrow $80,000 which have to be repaid in two years at j=10%. The cost of operating and maintaining the machine is $40,000 per year. The machine will be needed for two years and can be sold at the end of the second year for $120,000. For depreciation purposes the straight-line depreciation method with no half-year convention applies, Find the missing values in the following tables in order to determine if this was a good investment at MARR of 14%. The company's income tax is 40%. Your decision should be based on the PW criterion NOTE: Determining the missing values (10 volues) In the following table would make you capable of solving the problem, (10 points)

Explanation / Answer

Income Statement End of year 0 1 2 Revenue: 200000 200000 Expenses    Operating Costs 40000 40000    Depreciation 80000 80000    Debt Interest 8000 4191 Taxable Income 72000 75809 Tax (40%) 0 28800 30324 Net Income 0 43200 45485 Cash Flow Statement End of year 0 1 2 Operating Activities    Net Income 43200 45485    Depreciation 80000 80000 Investing Activities    Machine -280000    Salvage Value 120000    Gains Tax -48000 Financing Activities    Borrowed Money 80000    Principal Repayment -38095 -41905 Net Cash Flow -200000 85105 155580 PVIF (14%) 1 0.877193 0.769468 PV of Net Cash Flow -200000 74653.51 119714.1 Present Worth -5632.425362 Decision Since NPV is negative, it is not advisable to purchase the machine

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

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