Tyson Enterprises is considering investing in a machine that costs $30,000. The machine is expected to generate revenues of $10,000 per year for six years. The machine would be depreciated using the straight-line method with no half-year convention over its six year life and have no salvage value. The company considers the impact of income taxes in all of its capital investment decisions. The company has a 40 percent income tax rate and desires an after-tax rate of return of 12 percent on its investment. The net present value of the machine is:

Question

Quizplus · Accepted Answer

The correct answer is A because the net present value of the machine is $2,891. The net present value is calculated by taking the present value of the future cash flows and subtracting the initial investment. The present value of the future cash flows is calculated by multiplying the future cash flows by the present value factor. The present value factor is calculated by dividing 1 by (1 + r)^n, where r is the discount rate and n is the number of years. In this case, the discount rate is 12% and the number of years is 6. The present value of the future cash flows is $42,891. The initial investment is $30,000. Therefore, the net present value is $42,891 - $30,000 = $2,891.

Tyson Enterprises Is Considering Investing in a Machine That Costs