RCB Corporation Is Considering the Purchase of a Machine for Which

Essay

RCB Corporation is considering the purchase of a machine for which the initial cash outlay will be $100,000. Predicted net cash inflows before depreciation and taxes are $25,000 per year for the next five years. The machine will be depreciated (using the straight-line method) over the 5-year period with a zero estimated salvage value at the end of the period. The corporation's marginal tax rate is 40 percent and its cost of capital is 12 percent.
(a)Determine the annual net cash flow after depreciation and taxes for years 1-5.
(b)Determine the internal rate of return.
(c)Determine the net present value.
(d)Should RCB purchase the machine? Why or why not?
NOTE: This problem requires the use of present value tables or a financial calculator.