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. Show the formula.

1. The machine's initial outlay is:

a) $27,000

b) $20,000

c) $21,000

d) $23,000

Explanation / Answer

c) $21,000

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