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# Existing new machine machine original cost 50000

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Existing New Machine Machine Original cost \$50,000 \$90,000 Installation costs 0 4,000 Freight and insurance 0 6,000 Expected end salvage value 0 0 Depreciation method straight-line straight-line Expected useful life 10 years 5 years The existing machine has been in service for five years and could be sold currently for \$25,000. Calvin expects to realize annual before-tax reductions in labor costs of \$30,000 if the new machine is purchased and placed in service. If the new machine is purchased, the incremental cash flows for the first year would amount to a. \$18,000. b. \$24,000. c. \$30,000. d. \$45,000. 271. CSO: 2E1b LOS: 2E2E1c1f The owner of Woofie’s Video Rental cannot decide how to project the real costs of opening a rental store in a new shopping mall. The owner knows the capital investment required but is not sure of the returns from a store in a new mall. Historically, the video rental industry has had an inflation rate equal to the economic norm. The owner requires a real internal rate of return of 10%. Inflation is expected to be 3% during the next few years. The industry expects a new store to show a growth rate, without inflation, of 8%. First year revenues at the new store are expected to be \$400,000. The revenues for the second year, using both the real rate approach and the nominal rate approach, respectively, would be a. \$432,000 real and \$444,960 nominal. b. \$432,000 real and \$452,000 nominal. c. \$440,000 real and \$452,000 nominal. d. \$440,000 real and \$453,200 nominal.

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253 272. CSO: 2E1b LOS: 2E1b Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000 units for the next 5 years and then be discontinued. New equipment will be purchased for \$1,200,000 and cost \$300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost \$100,000 to remove the equipment, which can be sold for \$300,000. Additional working capital of \$400,000 will be required immediately and needed for the life of the product. The product will sell for \$80, with direct labor and material costs of \$65 per unit. Annual indirect costs will increase by \$500,000. Kell’s effective tax rate is 40%. In a capital budgeting analysis, what is the expected cash flow at time = 3 (3rd year of operation) that Kell should use to compute the net present value? a. \$300,000. b. \$720,000. c. \$760,000. d. \$800,000. 273. CSO: 2E1c LOS: 2E1c Sarah Birdsong has prepared a net present value (NPV) analysis for a 15-year equipment modernization program. Her initial calculations include a series of depreciation tax savings, which are then discounted. Birdsong is now considering the incorporation of inflation into the NPV analysis. If the depreciation tax savings were based on original equipment cost, which of the following options correctly shows how she should handle the program's cash operating costs and the firm's required rate return, respectively?
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