Reference no: EM132486109

Problem 1: Thornley Machines is considering a 3-year project with an initial cost of $840,000. The project will not directly produce any sales but will reduce operating costs by $435,000 a year. The equipment is depreciated straight-line to a zero book value over the life of the project. At the end of the project the equipment will be sold for an estimated $90,000. The tax rate is 34 percent. The project will require $22,000 in extra inventory for spare parts and accessories. Should this project be implemented if Thornley's requires a rate of return of 10 percent? Why or why not?

Problem 2: A 4-year project has an initial asset investment of $306,600, and initial net working capital investment of $29,200, and an annual operating cash flow of -$46,720. The fixed asset is fully depreciated over the life of the project and has no salvage value. The net working capital will be recovered when the project ends. The required return is 15 percent. What is the project's equivalent annual cost, or EAC?