# Essay - Wacc 1) We Will Assume that the Old Machine is...

WACC

1) We will assume that the old machine is fully depreciated. This makes the tax burden on the disposal as $34,000. The depreciati***** expense on the new machine will reduce the ***** burden, and ***** cost savings are assumed to translate directly to profit, which will increase the tax burden. The net effect is an increase in tax burden from the ***** mach*****e of $37,400 per year, which subtracts from the cost *****, giving a net ********** cash flow of $432,600. ***** net present value of the new machine therefore becomes $1,715,925.02. The present cash flows are the outlay for the new machine, ***** proceeds from the ***** of ***** ***** ***** and the tax ***** those proceeds. This totals $1,734,000. Therefore, the NPV of ***** purchase of the new machine is -$18,074.98. Theta Widgets should not purchase the new *****.

2) Capital budgeting decisions are complex. There are many variables that must be taken into consideration. Moreover, ***** information being used to make the decision is almost entirely based on estimates. The more accurate ***** inputs, the stronger the decision, but much of what goes into a capital budgeting decision is variable.

Inflation, for example, can have a signifi*****t impact on the outcome of the *****. For the most part, cost of capital reflects past conditions. *****re may be some element ***** future decisions, but as soon as a variable such as inflation differs from ***** ***** rate of inflation, the figures changes. The cost of capital used to make the decision h***** an assumed ***** of ***** built into it. If the rate of inflation increases, that cost of capital becomes obsolete. For this reason, comp*****ies should set a conservative hurdle ***** that assumes some adverse movement in the rate of *****. Even in doing so, most companies will bear ***** risk of a sharp spike in *****flation rates.

***** future cash flows would, in theory, need to be discounted at a higher rate to reflect the change ***** inflation. ***** will adversely affect the ***** value of those cash flows. This in turn will reduce ***** present ***** of those flows, and can erode the positive ***** present value that was derived in order to make the investment ***** in the first place. A firm will ideally ***** able to pass the inflation on to their customers in ***** to balance off the deterioration ***** value of the cash flows.

***** ***** decisions are filled with uncertainty. There ***** several ways for a company to limit this uncertainty or build in safeguards against adverse consequences. The first is to get ***** best information possible prior to making an investment dec*****ion. ***** figures ***** for future cash flows are going ***** be estimates, but some estimates are better than others. The ***** the quality of the in*****mation in the first place, ***** more ***** your NPV calculations will be.

*****nother way to deal ***** ***** is to make conservative estimates. A project that only has a positive

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