Question - Rooney, Inc. is considering the purchase of a new machine costing $750,000. The machine's useful life is expected to be 9 years with no salvage value. The straight-line depreciation method will be used. The net increase in annual after tax cash flow is expected to be $157,000. Rooney estimates its cost of capital to be 12%. (The present value of a $1 annuity for 9 years at 12% is 5.328, and the present value of $1 to be received in 9 years is 0.361.)
a) The net present value of the investment in the machine under consideration is:
b) Upper level managers at Rooney, Inc. are concerned that employee estimates of future cash flows from the new machine may be overly optimistic. To what dollar amount can the annual after tax cash flow fall before the investment in the new machine should be rejected?