Reference no: EM132016208

First American Incorporated is considering buying a new copier. It will cost $9,000 to purchase and $1,000 to ship and install. It has a five-year class life. At the end of four years they plan to sell the copier for $3,500. The new copier will allow FA to increase revenues by $2,000 each year but expenses will also increase by $500 each year. Account receivables will increase by $500 and account payables will increase by $800 if the copier is purchased. Straight-line depreciation will be used. FA’s marginal tax rate is 34% and its cost of capital is 5%. Complete parts A through E below.

a) The cost basis is

A: ($9,000)

B: ($9,700)

C: ($10,000)

D: ($10,300)

b) The chance in Working Capital in NICO is

A: $300

B:($300)

C: ($1,300)

D: $1,300

c) The Operating Cash Flow in year 2 is

A: ($300)

B: $1,670

C: $1,330

D: $1,500

d) The TCF is

A: $3,330

B: $3,370

C: $3,030

D: $3,200

e) What should First American do about this project?

A: Accept the project because the NPV is positive

B: Accept the project because the NPV is negative

C: Reject the project because the NPV is positive

D: Reject the project because the NPV is negative