You have been hired as a financial consultant by BUBBA Corporation. BUBBA is considering investing in a new machine to produce dog biscuits. BUBBA has provided you with the following information.
Base price of machine is $50,000
Machine modification cost for special use by BUBBA is $15,000.
BUBBA has a 30% average tax rate. BUBBA has a 35% marginal tax rate
The machine falls into the MACRS 3-year class
BUBBA will use the machine for 3 years and then plans sell it for $15,000 at the end of year 3.
The machine is expected to increase earnings before depreciation by $35,000 a year for the life of the machine.
BUBBA has a weighted average cost of capital of 11%.
Assume that the NPV under the above assumptions is $16,458.
Which of the following is true if the machine is expected to increase earnings by $40,000 per year instead of $35,000 per year?
The NPV will become larger and the project should be accepted
The NPV will become larger and the project should be rejected
The NPV will become smaller and the project should be rejected
The NPV will become smaller and the project should be accepted