Reference no: EM132580341
The Blue Corporation is purchasing a new soap machine for $15,400. Its annual output will bring in $3,000 more revenue than the old machine it is replacing. The old machine has no salvage value; nor will the new machine at the end of its 7-year estimated useful life. The new machine costs $1,000 less per year to operate than did the old machine. The income tax rate is 50%.
a. Will the new machine have a positive NPV if the minimum acceptable rate of return is 14% per year compounded annually? (Factor = 4.288). Show your calculations.
b. Assume the $3,000 of additional annual revenue from the new machine is not known with certainty. If the following probability distribution applies to each year's additional revenue from the new machine and management wants to make its decisions on the basis of the expected value of this additional revenue, should Blue Corporation invest in the new machine? Show your calculations.
Probability | Additional Revenue
0.10 |$2,000
0.20 | 3,000
0.40 | 3,600
0.15 | 5,000
0.10 | 8,000
0.05 | 10,000
c. Assume that, at the end of the seven years' useful life of the machine, the Blue Corporation's management finds that the machine did, in fact, generate the following amounts of additional revenue in the indicated years:
Year | Additional Revenue
1 | $8,000
2 | 7,000
3 | 6,000
4 | 5,000
5 | 4,000
Discounted at 10% compounded interest per year, what is the PV of this actual stream of additional revenue? Show your calculations.