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# If Adams’s cost of capital is 18 percent and its tax rate is 30 percent, should Adams buy the new machine? Why?

Products, Inc. manufactures a product it sells for \$25. Adams sells all of the
24,000 units per year it is capable of producing at the current time, and a
marketing study indicates that it could sell 14,000 more units per year. To
increase its capacity, Adams must buy a machine that has the capacity to
produce 50,000 units of its product annually. The existing equipment can
produce the product at a unit cost of \$16. Today it has a book value of \$80,000
and a market value of \$60,000. The new equipment could produce 50,000 units at
a unit cost of \$12. The new equipment would cost \$500,000 and would be
depreciated uniformly over its five-year life. If the new machine is purchased,
fixed operating costs will decrease by \$20,000 per year.

Question:

-If Adams’s cost of capital is 18
percent and its tax rate is 30 percent, should Adams buy the new machine? Why?

## Price: £ 45

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