Dexter Smith & Co

Multiple Choice

Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct?

A) As a project, the new machine has a net present value equal to minus one times the machine's purchase price.
B) The new machine will have a zero rate of return.
C) The new machine will generate positive operating cash flows.
D) The new machine will create a cash outflow when the firm disposes of the machine at the end of its life.
E) The new machine creates erosion effects.