American Steel Corporation is considering two investments. One is the purchase of a new continuous caster costing $100 million. The expected net present value of this project is $20 million. The other alternative is the purchase of a supermarket chain, also costing $100 million. It, too, has an expected net present value of $20 million. The firm’s management is interested in reducing the variability of itsearnings.a. Which project should the company invest in?b. What assumptions did you make to arrive at this decision?A firm has an opportunity to invest in a new device that will replace two of the firm’s older machines. The new device costs $570,000 and requires an additional outlay of $30,000 to cover installation and shipping. The new device will cause the firm to increase its net working capital by $20,000. Both the old machines can be sold—the first for $100,000 (book value equals $95,000) and the second for $150,000 (book value equals $75,000). The original cost of the first machine was $200,000, and the original cost of the second machine was $140,000. The firm’s marginal tax bracket is 40 percent. Compute the net investment for this project.
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