Warner Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Warner uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar.

Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Calculate the machine's net present value. Is the machine an attractive investment? Why?

Question

Warner Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Warner uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar.
  
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Calculate the machine's net present value. Is the machine an attractive investment? Why?

Quizplus · Accepted Answer

The Answer of Warner Corporation is considering the acquisition of a new machine that costs $350,000. The machine is expected to have a four-year service life and will produce annual savings in cash operating costs of $100,000. Warner uses the optional straight-line method of depreciation and depreciates the asset over its four-year service life. The company is subject to a 30% income tax rate, has an after-tax hurdle rate of 12%, and rounds calculations to the nearest dollar.
  
Required:
A. Determine the annual after-tax cash flows that result from acquisition of the machine.
B. Calculate the machine's net present value. Is the machine an attractive investment? Why?

Warner Corporation Is Considering the Acquisition of a New Machine