323. CSO: 2D2a LOS: 2D2b Lunar Inc. is considering the purchase of a machine for $500,000 which will last 5 years. A financial analysis is being developed using the following information. Year 1 Year 2 Year 3 Year 4 Year 5 Unit sales 10,000 10,000 20,000 20,000 20,000 Selling price per unit $ 100 $ 100 $ 100 $ 100 $ 100 Variable cost per unit 65 65 65 65 65 Fixed costs 300,000 300,000 300,000 300,000 300,000 Pre-tax cash flow 50,000 50,000 400,000 400,000 400,000 The machine will be depreciated over 5 years on a straight-line basis for tax purposes and Lunar is subject to a 40% effective income tax rate. Assuming Lunar will have significant taxable income from other lines of business, and using a 20% discount rate, the net present value of the project would be a. $(282,470). b. $(103,070). c. $(14,010). d. $16,530.

2D2B LUNAR INC. IS CONSIDERING THE PURCHASE OF A MACHINE FOR $500,000...

CMA EXAM SUPPORT PACKAGE 2

323.

CSO: 2D2a

LOS: 2D2b

Lunar Inc. is considering the purchase of a machine for $500,000 which will last 5 years.

A financial analysis is being developed using the following information.

Year 1

Year 2

Year 3

Year 4

Year 5

Unit sales

10,000 10,000 20,000 20,000 20,000

Selling price per unit

$ 100 $ 100 $ 100 $ 100 $ 100

Variable cost per unit

Fixed costs

300,000

Pre-tax cash flow

50,000

400,000

The machine will be depreciated over 5 years on a straight-line basis for tax purposes and

Lunar is subject to a 40% effective income tax rate. Assuming Lunar will have

significant taxable income from other lines of business, and using a 20% discount rate,

the net present value of the project would be

$(282,470).

$(103,070).

$(14,010).

$16,530.