Matsushita Machining (MPM) is considering acquiring a new precision cutting mach
ID: 2745312 • Letter: M
Question
Matsushita Machining (MPM) is considering acquiring a new precision cutting machine at a cost of $120,000. The need for this particular machine is expected to last only five years, after which the machine is expected to have a salvage value of $30,000. The annual operating cost is estimated at $20,000. The addition of this machine to the current production facility is expected to generate an additional revenue of $70,000 annually and will be depreciated in the seven-year MACRS property class. The income tax rate applicable to Charleston is 36%. The initial investment will be financed with 60% equity and 40% debt. The before-tax debt interest rate, which combines both short-term and longterm financing, is 12% with the loan to be repaid in equal annual installments. The equity interest rate (Q, which combines the two sources of common and preferred stocks, is 18%. Evaluate this investment project by using net equity flows. Evaluate this investment project by using k.Explanation / Answer
Calculation of Interest-
NPV is positive hence machine should be purchased.
Year 1 Year 2 Year 3 Year 4 Year 5 Additional Revenue $70,000.00 $70,000.00 $70,000.00 $70,000.00 $70,000.00 Less: Operating Cost $20,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 Depreciation $17,143.00 $29,388.00 $20,991.00 $14,994.00 $10,710.00 Interest Expense $5,760.00 $4,853.32 $3,837.83 $2,700.49 $1,426.67 Profit before tax $27,097.00 $15,758.68 $25,171.17 $32,305.51 $37,863.33 Less: Tax expense $9,754.92 $5,673.13 $9,061.62 $11,629.98 $13,630.80 Net Income after tax $17,342.08 $10,085.56 $16,109.55 $20,675.53 $24,232.53 Add: Depreciation $17,143.00 $29,388.00 $20,991.00 $14,994.00 $10,710.00 Net Cash flow $34,485.08 $39,473.56 $37,100.55 $35,669.53 $34,942.53