Use the following information to answer questions 11 – 15. First American is con
ID: 2822602 • Letter: U
Question
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
$395
$3,605
$905
$2,255
Explanation / Answer
ANSWER:
Year 0 1 Initial cost of the machine -3,000.00 Shipping cost -300.00 Revenue increase 1800 Expense increase 400 Inventory decrease 1000.00 Accounts payables increase 350 Depreciation 1,000 Salvage value 2,000 Cash flow before tax 3,750.00 Tax 34% 1275 Cash flow after tax 3,605.00 Cost of capital 7.00% NPV 65.00 TCF is 3605 NPV is -65 so FA should not accept this project