A company is considering the purchase of a new production machine and is not sure whether the project fulfills its investment objective. The company requires that all investments must have a positive net present value (NPV). The machine costs $100,000 and will be depreciated for tax purposes on a straight-line basis over its useful life of 5 years. After 5 years the used equipment will be sold. The project requires an initial investment in working capital of $20,000 and will generate $30,000 of pretax operating cash inflow annually. The company has a 25% effective income tax rate and uses a 10% discount rate for investment projects. Of the four estimated ranges shown below, which is the approximate minimum sales price that must be realized for the used equipment at the end of Year 5 in order to achieve a positive NPV on this project?
A. $5,250-$5,625
B. $7,000-$7,500
C. $10,000-$13,500
D. $800-$1,200
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Syed Yousuf Jamal
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