A firm is considering the purchase of a $500,000 machine for its business. The machine is expected to increase sales by $237,000. The machine will have a 5 year useful life and will be depreciated over 5 years via the straight line method. There is no salvage value. The firm has a required rate of return of 10% for all new capital investments. The project's pro forma income statement is shown below:
Sales $237,000
Total Cost 137,000
Depreciation 100,000
EBIT $0
Taxes 0
Net income $0
The firm should:
a. Accept the project because the NPV is $2,543
b. Accept the project because the NPV is $10,011
c. Reject the project because the NPV is negative $120,921
d. Reject the project because the NPV is negative $500,000
e. It doesnt matter since the NPV is 0
f. Cant tell since there isnt enough information
Answers: 1
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