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1st of the next year. Option One -- Acquire a New Finishing Machine The cost...

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Accounting

1st of the next year.

Option One -- Acquire a New Finishing Machine

The cost of the machine is $1,000,000, and it will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine.

Option Two -- Outsource the Finishing Work

Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine.

Verlas effective income tax rate is 40%. The weighted-average cost of capital is 10%.

The firms net present value of outsourcing the finishing work is
A. $303,280 net cash outflow.
B. $404,920 net cash outflow.
C. $454,920 net cash outflow.
D. $758,200 net cash outflow

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