1. First American is considering buying a new machine to increase production. It will cost $3,000. Shipping will be $300. It has a three-year class life. At the end of one year they plan to sell the machine for $2,000. The new machine will allow FA to increase revenues by $1,800 each year but expenses will increase by $400 each year. If the new machine is purchased, inventory will decrease by $1,000 and accounts payable will increase by 350. Straight-line depreciation will be used. FA’s marginal tax rate is 34% and its cost of capital is 7%. What is the NICO for this project?
a) $4,650
b) -$1,950
c) $3,950
d) $3,950
2. First American is considering buying a new machine to increase production. It will cost $3,000. Shipping will be $300. It has a three-year class life. At the end of one year they plan to sell the machine for $2,000. The new machine will allow FA to increase revenues by $1,800 each year but expenses will increase by $400 each year. If the new machine is purchased, inventory will decrease by $1,000 and accounts payable will increase by 350. Straight-line depreciation will be used. FA’s marginal tax rate is 34% and its cost of capital is 7%.
What is the depreciation for years 1 – 4?
a) $1,100; $1,100; $1,100; 0
b) $325; $650; $650; $325
c) $775; $1,550; $1,550; $775
d) $550; $1,100; $1,100; $550