Jobby ltd uses straight line depreciation for its assets

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Reference no: EM132949202

Question

1. For this question answers as a, b, c, d and e. Jobby Ltd is considering whether to purchase a new machine. It will cost $360,000 to purchase and $40,000 to install. It is expected to generate additional annual revenues of $80,000 per year for eight years, at which time it will have no further use or value. If the machine is purchased, it will cost an additional $1,000 in electricity per year to operate.

Jobby Ltd uses straight line depreciation for its assets.

The company's required rate of return is 7% (the present value factor of an annuity of eight years @ 7% is 5.97).

The corporate tax rate is 30%

Required:

a. What is the payback period for this project? (Ignore taxes for part (a))

b. What is the flow cash flow in year zero?

c. Calculate the tax shield (the incremental cash saving based on depreciation ONLY) for years 1-8.

d. Calculate the NPV of this investment

e. Should the company accept this project? Why or Why not?

Reference no: EM132949202

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