Answered: Using the information above, determine…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Assume everything is given in n=0, CONSTANT dollars unless otherwise stated:

MTA Textile INC. is considering to invest on a computer-controlled fabric cutting machine. The machine’s purchasing price is $150,000. The part of the initial cost of this investment will be paid using a $50,000 loan. The loan will be repaid in yearly installment for four years at 12%. This project requires a working capital investment of $15,000 at year 0. This investment on working capital will be fully recovered after the project is terminated. The salvage value of this investment at the end of fourth years is expected to be $40,000. This machine will generate annual revenues of $55,000, but have annual operating costs of $3,000. The equipment has a 45% declining balance rate for CCA calculations. The marginal income tax rate for the firm is given as 35%. A general inflation rate is expected to be 5%. However, the firm also expects 8% annual increase in revenue and working capital and a 4% annual increase in operating costs caused by inflation. The firm’s market interest rate is 18%.

Using the information above, determine the present worth in constant dollars.

Question 15 options:

a)	Between $77,800 and $78,700

b)	Between $12,700 and $13,300

c)	Between $87,800 and $88,700

d)	Between $57,800 and $58,700

e)	None of the answers are correct

f)	Between $33,400 and $34,800

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