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Should the company invest in the machine

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Reference no: EM132529824

A company is thinking about investing in a new machine to increase production and sales capacity.

The following information is given:

  1. Required initial investment: $9 million
  2. Increased sales of $6 million per year for three years.
  3. Increased cost (not including depreciation cost) of $1 million per year for three years.
  4. Yearly depreciation, years one and two: $500,000
  5. The machine will be fully depreciated down to a zero balance in year three.
  6. $1,993,716 in removal cost will be paid to take away the machine at the end of the three year life.
  7. Assume a tax rate of 20%.
  8. Required cost of capital: 17%

Question a) Should the company invest in this machine? (Round to the nearest $ (no decimals). So $3,578.44 would be rounded to $3,578). Why or why not?

Question b) What is the return this machine actually generates?

Reference no: EM132529824

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