Reference no: EM132533069

Point 1: The company is considering the purchase of a new washing machine to replace with the old one.

Point 2: The new machine will cost $100.000 and the shipping and installation costs are $30.000.

Point 3: The firm is eligible for a 10% tax credit in this investment.

Point 4: The old machine is fully depreciated and will be sold for $8.000 immediately with the purchase of the new one.

Point 5: The useful life of the new machine is 5 years and the company uses accelerated method for depreciation.

Point 6: Revenues are expected to increase by $140.000 for each of the next 4 years and the machine will be sold for $12.000 at the end of the 4th year.

Point 7: Operating costs will rise by $70.000 for each of the next 4 years.

Point 8: Moreover, accounts receivable will increase by $5.000, inventories will decrease by $6.000 and accounts payable will increase by $3.000 each year.

Point 9: Tax rate is 30% for the company.

Question 1. Setup all of the cash flows of the project for each year systematically.

Question 2. Evaluate the following techniques for this capital project (suppose that rf=4%, Rm-rf=10%, beta=1,3, after-tax cost of debt = 12%, D/E=0,25)

a. Payback period

b. Discounted payback period

c. Net present value

d. Profitability index