Test 2 workshop - no answers

# Test 2 workshop - no answers - You are considering the...

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You are considering the purchase of new production equipment. If the new equipment is purchased, the old equipment (which is fully depreciated) can be sold for \$50,000. The new equipment will cost \$400,000. If the new equipment is purchased, the company’s revenues will increase by \$175,000 and costs by\$25,000 each year of the equipments 3 year life. The new machine will be depreciated using a three year MACRS schedule (33.0%, 45%, 15%, and 7%). At the end of the life of the equipment, you expect that it can be sold for \$10,000. The firm has a marginal tax rate of 40% and the cost of capital on this project is 20%. Find and interpret the project’s NPV and IRR 0 1 2 3 Cost (400) Sale of old* 30 NPV = -62,574

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IRR = 8.796% Therefore, REJECT!!
The Taiheiyo Chemical Corporation Problem The Taiheiyo Chemical Corporation is considering replacing a 5-year-old machine that originally cost \$50,000, presently has a book value of \$25,000, and could be sold for \$60,000. This machine is currently being depreciated using the simplified straight-line method down to a terminal value of zero over the next 5 years, generating depreciation of \$5,000 per year. The

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## This note was uploaded on 10/23/2011 for the course BUS M 301 taught by Professor Jimbrau during the Fall '11 term at BYU.

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Test 2 workshop - no answers - You are considering the...

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