Can someone please help me to answer Question 2? Thank-you.
Tutorial 7 — Capital Budgeting 2 Associated with a ﬁrm’s planned purchase of new $250,000 equipment is an immediatedecrease in inventory of $60,000. Should this figure be ignored in a capital budgeting analysis of the new equipment? Explain. What about the $50,000 cash that the ﬁrm already has thatwill reduce the equipment cost to $200,000? A ﬁrm is contemplating the purchase of new automated plant costing $240,000 to replace anexisting machine that can be sold for $110,000 today. The existing machine (which cancontinue to be operated for a further four years) was purchased one year ago for $100,000and is being depreciated over its ﬁve-year life. For each year of its life the new plant’stechnology will allow the firm to reduce annual expenses by $80,000. Annual sales will remainat the current level of $160,000 with the new machine. Although the new machine will onlybe used for a four-year period, it has an eight-year depreciable life and an assumed disposalvalue of zero in four years’ time. What are the relevant cash flows for each year of the newmachine’s life? Assume the company tax rate is 30%.
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