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

Answer 1

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