Use the following information to answer questions 11 – 15. First American is considering buying a new machine to increase production. It will cost $3,000. Shipping will be $300. It has a three-year class life. At the end of one year they plan to sell the machine for $2,000. The new machine will allow FA to increase revenues by $1,800 each year but expenses will increase by $400 each year. If the new machine is purchased, inventory will decrease by $1,000 and accounts payable will increase by 350. Straight-line depreciation will be used. FA\'s marginal tax rate is 34% and its cost of capital is 7%. What is the Terminal Cash Flow (TCF) and should FA accept this project?
What is the Terminal Cash Flow (TCF)
$395
$3,605
$905
$2,255
Should FA accept this project?
Yes, the NPV is $65.89
No, the NPV is -$65.89
No, the NPV is -$543
No, the NPV is -$912
ANSWER:
| Year | 0 | 1 |
| Initial cost of the machine | | |
| | | |
| Revenue increase | | 1800 |
| | | 400 |
| | | 1000.00 |
| Accounts payables increase | | | 350 |
| Depreciation | | 1,000 |
| | | 2,000 |
| | | 3,750.00 |
| | | 1275 |
| | | |
| | | |
| NPV | 65.00 | |
| | |
| | | |
| NPV is -65 so FA should not accept this project | | | |
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