(Appendix 12A)Hamlet and Horatio are gravediggers. They are currently considering investing in a new machine to replace their outdated shovels. The new machine would cost $30,000 and have an expected useful life of five years. If Hamlet and Horatio buy the new machine, their annual cash flows would increase by $8,000. The machine's estimated terminal value is $3,000. Hamlet and Horatio assume an inflation rate of 2%, a risk-free rate of 4%, and a risk premium of 5%. Their marginal income tax rate is 20%, and they plan to use straight-line amortization for income taxes (ignore the half-year convention).
a)Calculate the net present value of the new machine using the nominal method.
b)Calculate the net present value of the new machine using the real method.

Question

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The Answer of (Appendix 12A)Hamlet and Horatio are gravediggers. They are currently considering investing in a new machine to replace their outdated shovels. The new machine would cost $30,000 and have an expected useful life of five years. If Hamlet and Horatio buy the new machine, their annual cash flows would increase by $8,000. The machine's estimated terminal value is $3,000. Hamlet and Horatio assume an inflation rate of 2%, a risk-free rate of 4%, and a risk premium of 5%. Their marginal income tax rate is 20%, and they plan to use straight-line amortization for income taxes (ignore the half-year convention).
a)Calculate the net present value of the new machine using the nominal method.
b)Calculate the net present value of the new machine using the real method.

(Appendix 12A)Hamlet and Horatio Are Gravediggers