The Psychic Cookie Company is considering the purchase of a new machine to produce fortune cookies in January 2010.The fortune cookie machine will cost $270,000 and Psychic's management expects it to last 6 years.If it purchases the new machine it will sell its old machine with a book value of $20,000 for $25,000 cash.At the end of six years the new machine is expected to have no salvage value.Depreciation each year on the fortune cookie machine will be $45,000 and Psychic's tax rate is 30%.The Pretax cash flows expected from the machine at the end of the following year are:
Required:
(A.)Calculate the net present of the new machine if the cost of capital is 15%.
(B.)Indicate whether or not Psychic should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

Question

The Psychic Cookie Company is considering the purchase of a new machine to produce fortune cookies in January 2010.The fortune cookie machine will cost $270,000 and Psychic's management expects it to last 6 years.If it purchases the new machine it will sell its old machine with a book value of $20,000 for $25,000 cash.At the end of six years the new machine is expected to have no salvage value.Depreciation each year on the fortune cookie machine will be $45,000 and Psychic's tax rate is 30%.The Pretax cash flows expected from the machine at the end of the following year are:
  Required:
(A.)Calculate the net present of the new machine if the cost of capital is 15%.
(B.)Indicate whether or not Psychic should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

Quizplus · Accepted Answer

The Answer of The Psychic Cookie Company is considering the purchase of a new machine to produce fortune cookies in January 2010.The fortune cookie machine will cost $270,000 and Psychic's management expects it to last 6 years.If it purchases the new machine it will sell its old machine with a book value of $20,000 for $25,000 cash.At the end of six years the new machine is expected to have no salvage value.Depreciation each year on the fortune cookie machine will be $45,000 and Psychic's tax rate is 30%.The Pretax cash flows expected from the machine at the end of the following year are:
  Required:
(A.)Calculate the net present of the new machine if the cost of capital is 15%.
(B.)Indicate whether or not Psychic should buy the new machine and explain the basis for your decision (do not use positive or negative NPV as an explanation):

The Psychic Cookie Company Is Considering the Purchase of a New