Delta Inc. is considering the purchase of a new machine which is expected to inc

Question

Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is $20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent. 1. The machine's initial outlay is: a) $27,000. b) $20,000. c) $21,000. d) $23,000. 2. The machine's incremental after-tax cash inflow for year 1 is: A) $6,420. B) $7,980. C) $8,620. D) $5,980 3. The machine's after-tax incremental cash flow in year five is: A) $6,980. B) $5,980. C) $7,120. D) $8,620 4. The machine's NPV is: A) $1,556.56. B) $2,556.56. C) $1,123.99. D) $2,123.99

Explanation / Answer

The machine's initial outlay is: d) $23,000 The machine's incremental after-tax cash inflow for year 1 is: A) $6,420. The machine's after-tax incremental cash flow in year five is: D) $8,620

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