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Buying a new machine to increase production

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Reference no: EM132509764

First American is considering buying a new machine to increase production. It will cost $3,000. Shipping will be $300. It has a three-year class life. At the end of one year they plan to sell the machine for $2,000. The new machine will allow FA to increase revenues by $1,800 each year but expenses will increase by $400 each year. If the new machine is purchased, inventory will decrease by $1,000 and accounts payable will increase by 350. Straight-line depreciation will be used. FA's marginal tax rate is 34% and its cost of capital is 7%.

  • What is the NICO for this project?
  • What is OCF for year 1?
  • What is terminal cash flow?
  • Should FA accept or reject project?

Reference no: EM132509764

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