How can I find the R for PV(sale of machine) and PV(tax on machine sale)?? What

Question

How can I find the R for PV(sale of machine) and PV(tax on machine sale)??

What is the R in this question?

Please help me!! Thank you.

hat produces bowling bals, d to be 8,000 units per 4. The Baldwin Company is considering investing in a machine t The cost of the machine is $100,000 and production is expecte year during the five-year life of the machine. The expected resale value is $5,000 (in real terms). Since the interest in bowling is declining, the mana of bowling balls will increase at only 2% per year. The nominal price of bowling balls in the first year will be $20. On the other hand, plastic used to produce bowling balls is gement believes that the nominal price rapidly becoming more expensive. Because of this, production costs are expected to grow % (nominally) per year. First-year nominal production costs will be $10 per unit. The machine will be depreciated to zero on a straight-line basis over five years. The company's tax rate is 34% and its nominal cost of capital is 15%. The rate of inflation is 5%. Should the project be undertaken?

Explanation / Answer

R is the real rate of interest

[(1+nominal)/(1+Inflation)]-1

Real rate of interest

=[(1+15%)/(1+5%)]-1

=9.5238%

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