ABC Company is a construction company which is considering purchasing an automatic concrete loading machine. The new machine will cost $600,000 and have a useful life of 5 years. To operate the machine the ABC will hire one operator at a cost of $120,000 annually and incur maintenance costs of $75,000 annually. The machine would be depreciated on a straight line basis to zero at the end of its useful life. If the company invests in this machine there will be an increase in revenue from sale of concrete of $235,000. The firm is also likely to experience an increase in the profits from lumber by $185,000 annually. Assume all cash flows are after-tax and the company’s cost of capital is 10%.
A. Calculate the incremental after-tax cash flows for the loading machine.
B. Determine whether or not ABC should purchase the machine based on the Net Present Value of the decision.
C. Briefly explain why bond prices vary negatively with interest rate movements.