Contemporary Engineering Economics 6th Edition by Chan Park

Exercise 6

Matsushita Machining (MPM) is considering acquiring a new precision cutting machine at a cost of $120,000. The need for this particular machine is expected to last only five years, after which the machine is expected to have a salvage value of $30,000. The annual operating cost is estimated at $20,000. The addition of this machine to the current production facility is expected to generate an additional revenue of $70,000 annually and will be depreciated in the seven-year MACRS property class. The income tax rate applicable to Charleston is 36%. The initial investment will be financed with 60% equity and 40% debt. The before-tax debt interest rate, which combines both short-term and longterm financing, is 12% with the loan to be repaid in equal annual installments. The equity interest rate (Q, which combines the two sources of common and preferred stocks, is 18%.
(a) Evaluate this investment project by using net equity flows.
(b) Evaluate this investment project by using k.