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The following facts are presented on an opportunity to invest in Machine A: Cost of equipment is $200,000. The machine has an expected 4-year useful life; it will be depreciated according to the 3-year Modified Accelerated Cost Recovery System (MACRS). The estimated salvage value at the end of 4 years would be $20,000. The additional investment in working capital required would be $18,000. The applicable tax rate is 30 percent. The operating profits (excluding depreciation expenses) are estimated to be $80,000 per year for 4 years. The applicable cost of capital is 10 percent.
(a) Please calculate the NPV and IRR of the project.
(b) If the cost of new machine has increased to $235,000, what are the NPV and IRR of the project?
What factors may contribute to the decline in usefulness of operating assets? Should the choice of depreciation method be related to these factors? Must a company choose just one method of depreciation for all assets? Explain
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In financial statement analysis, ratios are:
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