RoadRollers Paving Company Is Considering Buying a New Asphalt Laying

Essay

RoadRollers Paving Company is considering buying a new asphalt laying machine. The machine costs $1,300,000 and can be depreciated to zero on a straight-line basis over its life of 10 years. The machine is expected to have no salvage value. Revenues are expected to be $600,000 per year, and cost are estimated at $220,000 per year. Operating cash flows are expected to rise with inflation, forecasted at 4% per year. The risk free rate of interest is 2% and the real interest rate is 4.0%, and given the expected inflation rate, the nominal rate is 8.16%. The firm is in the 34% tax bracket. Should the investment be undertaken?
A._04,10 = $1,955,974.73
Depreciation tax shield = (8.1109) ($130,000) (.34) = $358,501.78
NPV = $2,314,476.51 - 1,300,000 = $1,014,476.51); Accept.