A machine can be purchased for $10,500, including transportation charges, but in

Question

A machine can be purchased for $10,500, including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate.

A machine can be purchased for $10,500, including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash operating expenses are expected to be $2,000, with depreciation of $3,000 per year. The firm has a 30 percent tax rate.

• a. Determine the relevant after-tax cash flows and prepare a cash flow schedule.

• b. Calculate the payback period for the machine.

• c. If the project’s cost of capital is 10 percent, would you recommend buying the machine?

• d. Estimate the internal rate of return for the machine.

Explanation / Answer

a) revenues= 6000x4= 24000 for 4 years

operating expenses= 2000x4= 8000

depreciation = 3000x4= 12000

so net revenue= 24000-8000-12000=4000

tax= 30% of 4000 = 1200

cash flow= 2800$

b) 4 years

c) no

d) 5%

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