Should the firm purchase the system and why

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Reference no: EM131971084

1. After the long drought of 1992, the manager of Long Branch Farm is considering the installation of an irrigation system. The system has an invoice price of $100,000 and will cost an additional $15,000 to install. It is estimated that it will increase revenues by $20,000 annually, although operating expenses other than depreciation will also increase by $5,000.

The system will be depreciated straight-line over its depreciable life (5 years) to a zero salvage value. The system can actually be sold for an estimated $25,000 at the end of 5 years. If the tax rate on ordinary income is 40 percent and the firm's required rate of return is 16 percent, should the firm purchase the system? Why?

2. Matrix Printers, Inc. is considering entering the laser printing business. An entirely new plant will be needed which will cost $1, 500,000. Land for the plant will cost an additional $250,000. Both of these costs will be incurred immediately. The plant will be depreciated straight line over its 15 year life. (Remember the rule about depreciating land.)

In addition to these costs an investment of $100,000 will be needed for working capital. The plant will generate sales of $300,000 per year and have associated expenses of $175,000. The firms marginal tax rate is 34%. The plant will be sold in 15 years for $700,000. What is the NPV of making this investment if the required rate of return is 16%. Should they make the investment?

Reference no: EM131971084

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