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Question - The Zenden Corporation is evaluating the purchase of a machine. The new machine would cost $225,000 and be depreciated for tax purposes by the straight-line method over a 7-year life to a salvage value of $15,000. In each year of the machine's life, Zenden Corp. would save $60,000. At the end of its life, the machine could be sold for its accounting salvage value of $15,000. Zenden's tax rate (federal plus state) is 35%, and it has a 12% WACC. What is the net present value of this capital budgeting project Gudjohnsen Incorporated is considering an investment that costs $62,500 and returns net cash flows of $12,000 per year for ten years. Its expected salvage value of $4,500 after the tenth year will equal the book value. Gudjohnsen has a debt ratio of 30%, a cost of debt of 6.5% and a cost of equity of 14%.
Required -
a) What is the investment's WACC?
b) Should Gudjohnsen accept the investment?
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