Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Information for Terra Corp. Terra Corp is considering the purchase of a machine that is expected to cost $180,000.  The machine will require an additional $40,000 to have it shipped, modified, and installed.  The purchase of this machine is expected to require additional working capital of $20,000 upfront, which will be liquidated when the machine is sold off.  Terra expects to use the machine for 4 years, and then sell it for $95,000.  The machine will be fully depreciated over the four years, at a constant rate.  In each of the four years, Terra’s revenues are expected to be $85,000 higher than they would be without the machine.  Annual operating costs (not including depreciation) will also be higher, however, to the extent of $19,000.  The firm pays a 30% rate in taxes, and its cost of capital is 7.5%

The net present value of the project is estimated to be:
   
$34,774
   
$37,694
   
$23,976
   
$16,353
   
$1,337
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