Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will depreciate the machine on the straight-line basis for four years, even though it has a 15% chance that it may last for five years. The tax rate of Benton is 40%, and the proper discount rate is 12%. Find the maximum price that Benton should pay for this machine to make it a profitable investment
Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will depreciate the machine on the straight-line basis for four years, even though it has a 15% chance that it may last for five years. The tax rate of Benton is 40%, and the proper discount rate is 12%. Find the maximum price that Benton should pay for this machine to make it a profitable investment
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Benton Corporation is planning to buy a machine that may add $6000 to the pre-tax earnings of the company if the economy is good (probability 65%), or only $4700 if the economy is bad (probability 35%). Benton will
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