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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.
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Running head: CASH FLOWS
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CASH FLOWS:
Name:
Institution affiliation:
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CASH FLOWS
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1 - Mayberry Textiles Inc. asset's life. Mayberry's cost of capital is 14 percent.
The net present value of Mayberry Textiles
In determining the projects net present value, it is important to consider the discounting
factor and the present values of the investment. The projects present value (PV) is the current
amount of the future amount of cash flow or a given flow of income that is provided at a specified
discounting rate or rate of return (Barth et al., 2016). The future cash flows of the investment have
to be discounted at the given discounting rate. When the discounting price is high, it provides a
lower present value, whereas when it is more economical, it provides a higher current cost.
Therefore, selection of an appropriate discounting rate is a critical issue in decision making.
The discounting rate is the project's rate of return that is applied to the net present value of
the venture (Jenkinson et al., 2019). It can be therefore said that the discounting price is the
investment's foregone rate of return in case an investor decides to select a given amount in the
future period versus the same value of the investment at present. Choice of the discounting rate
needs to be highly subjective since the expected rate of return of the investment would be received
if invested at the present date for a given period. It can, therefore, be said that the discounting
rate is the sum of the time value of the applicable interest rate that when computed, it increases the...
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