1. Mayberry Textiles Inc. is considering the purchase of a new machine which has an initial cost of $400,000. Annual operating cash inflows are expected to be $100,000 each year for eight years. No salvage value is expected at the end of the asset’s life. Mayberry’s cost of capital is 14 percent.
Compute the net present value of the machine. (Ignore income taxes)
2. Bayleaf Inc is considering the purchase of a machine that costs $250,000. The machine is expected to generate revenues of $85,000 per year for five years. The machine would be depreciated using the straight-line method over a five-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
Compute the net present value of the machine.
In 400 words:
3. Discuss and describe the process in which the internal rate of return is used to accept or reject projects.
4. Discuss the profitability index and describe how it is used in capital investment decisions.