The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one

The Balboa Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $600,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 year, but it can sell it now to another firm in the industry for $265,000. The old machine is being depreciated by $120,000 per year, using the straight line method.

The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $145,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11% and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $255,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC.

a) What is the initial net cash flow if the new machine is purchased and the old one is replaced?
b) Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made.
c) What are the incremental net cash flows in Years 1 through 5?
d) Should the firm purchase the new machine? Support your answer.
e) In general, how would each of the following factors affect the investment decision, and how should each be treated?
(1) The expected life of the existing machine decreases.
(2) The WACC is not constant but is increasing as Balboa adds more projects into its
capital budget for the year.

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The efficient market hypothesis requires

1) The efficient market hypothesis requires

2) If financial markets are efficient, that suggests that

3) Which of the following is included in an individual's cash budget?

4) The tendency for securities prices to overreact may create an anomaly that can lead to superior returns.

a. True

b. False

5) Contributions to a Roth IRA are not tax-deductible.

a. True

b. False

6) Pension plans permit investors to defer income tax.

a. True

b. False

7) With a Roth IRA, the individual

8) Possible investment objectives may include

9) The amount of an outstanding mortgage appears on the individual's balance sheet.

a. True

b. False

10) One anomaly to the efficient market hypothesis is that investments in debt of large firms will earn higher returns than investments in their stock.

a. True

b. False

11) The process of financial planning requires the individual to

12) Examples of tax shelters for individuals include

13) Short-term capital gains are subject to higher tax rates than long-term capital gains.

a. True

b. False

14) Which of the following currently reduces taxes?

15) Net short-term capital losses are used to offset

16) An active portfolio strategy is premised on

17) The traditional IRA is

18) Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.

a. True

b. False

19) One of the first steps an investor should take is to establish the goals of the portfolio.

a. True

b. False

20) An implication of the efficient market hypothesis is

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