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 NICO for this project?
What is the Terminal Cash Flow (TCF)
a) $395
b) $3,605
c) $905
d) $2,255
Should FA accept this project?
a) Yes, the NPV is $65.89
b) No, the NPV is -$65.89
c) No, the NPV is -$543
d) No, the NPV is -$912