Reference no: EM13340822
Question 1:
As of January 2, 2012, you have just completed a discounted cash flow analysis on a $250,000 investment. You calculated after-tax cash flows (including the following tax shield). You then determined that the project has a positive net present value using the company's cost of capital of 15 percent. You reported your findings to your supervisor and recommended that the company make the investment. To your surprise, the supervisor rejected the acquisition. He said that company policy was to not invest in any project in which the cash flows do not recover the initial investment in three years. He points out that of the $250,000 expended; only $190,000 would be recovered in three years.
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After-Tax Cash Flows
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2012
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$ 20,000
|
|
2013
|
50,000
|
|
2014
|
120,000
|
|
2015
|
100,000
|
|
2016
|
100,000
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2017
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90,000
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2018
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80,000
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Required:
A. Complete the net present value analysis showing that the investment should be undertaken.
B. Write a memo explaining why the company should make this investment and why the company should scrap its three-year payback rule.
Question 2:
Mercil Corporation is going to buy one of the following two machines. Each machine meets the specifications for a particular task in the company. Mercil's tax rate is 30 percent and its cost of capital is 15 percent.
-Which machine should Mercil buy and why?
Machine A: Costs $90,000 to acquire and $12,000 cash a year to operate in each year of its 10-year life. Annual depreciation is $9,000, and the machine has no salvage value.
Machine B: Costs $50,000 to acquire and $24,600 a year to operate in each year of its 10-year life. Annual depreciation is $5,000, and the machine has no salvage value.