Capital Budgeting decisions
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You have been asked by the president of your company to evaluate the proposed acquisition of a new hydropropolaser for the R&D department. The price for this equipment is $70,000, and it would cost another $14,000 to modify it for special use by your firm. The hydropropolaser, which has a MACRS 3-year recovery period (wts. 33%, 45%, 15%, 7%) would be sold after 3 years for $30,000. Use of this equipment would require an increase in net working capital of $11,000. The hydropropolaser would have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 36%.
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Solution Summary
This explains the concept of capital budgeting decision with the help of NPV through analysis of case and step by step explanation.
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1. What is the initial net investment for the machine (CF0)?
Price of machine $70,000.00
modification $14,000.00
increase in net working capital $11,000.00
Initial Net Investment for machine $95,000.00
CORRECT
ASSUMPTIONS
1. Project is completed after sale of Machinery that is after 3 years
2. There is no capital gain tax
2. What are the net operating ...
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