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Unformatted text preview: must be considered in capital budgeting. It is treated just like any other cash inflow – we
record the present value of the benefit as part of our net present value calculation. Example:
Pizzaria Magnifico is considering the purchase of a pinball machine for its pizza shop. It
estimates that the machine will generate an additional $6,600 in pre-tax cash inflows per year
for each of the next five years. The machine will cost $20,000 today and have a $1,000
residual value at the end of the five years. Pizzaria is subject to a 40% tax rate. Its after tax
cost of capital is 10%. Should Pizzaria buy the pinball machine? Use net present value
analysis to evaluate the investment.
First, make sure you understand the problem by drawing a timeline of the pre-tax cash flows,
showing inflows as positive...
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This note was uploaded on 09/29/2011 for the course 06A 002 taught by Professor Stuff during the Spring '11 term at University of Iowa.
- Spring '11