Reference no: EM132953563

Company XYZ is considering investing in a new machine that will cost $15,000. The machine will allow the firm to generate sales of $50,000 per year. The machine has a useful life of three years. Operating expenses are projected to be 70 percent of total sales. Assume straight-line depreciation over three years to a zero salvage value. The market value of the machine in three years is estimated to be $5,000. The marginal tax rate of the firm is 35 percent. If the discount rate is 6 percent, should the investment be undertaken?

1. The Rountree Oil Company is in the process of cleaning up a minor oil spill. The firm could do the work with one cleanup team or two teams. One team would cost $25 per month for five months. The two-team alternative would cost $40 per month for three months. If two teams are used, the firm can restart refining sooner and collect $10 in earnings in Months 4 and 5. Should Rountree Oil use one or two teams to clean up the spill? Base your decision on the IRR. (Hint: You want to look at the incremental cash flows between the two methods.)