Reference no: EM132891360

Automax Auto Parts Corporation is purchasing a new molding machine for $15,400. Its annual output will bring in $3,000 more revenue than the old machine it is replacing. The old machine has no salvage value; nor will the new machine at the end of its seven-year estimated useful life. The new machine costs $1,000 less per year to operate than did the old machine. The income tax rate is 50 percent.

1. Will the new machine have a positive net present value if the minimum acceptable rate of return is 14 percent per year compounded annually? (Factor = 4.288) Show your calculations

Answer:

2. Assume the $3,000 of additional annual revenue from the new machine is not known with certainty. If the following probability distribution applies to each year's additional revenue from the new machine and management wants to make its decisions on the basis of the expected value of this additional revenue, should Automax Auto Parts Corporation invest in the new machine? Show your calculations
                                                    
Probability                 Additional Revenue

0.10                                  $ 2,000

0.20                                     3,000

0.40                                     3,600

0.15                                     5,000

0.10                                     8,000

0.05                                   10,000

Answer:

3. Assume that, at the end of the seven years' useful life of the machine, Automax Auto Parts Corporation's management finds that the machine did, in fact, generate the following amounts of additional revenue in the indicated years:

Year                 Additional Revenue

1                             $8,000

2                               7,000

3                               6,000

4                               5,000

5                               4,000

Discounted at (10) ten percent compounded interest per year, what is the present value of this actual stream of additional revenue? Show your calculations.