Durable Inc. is considering the purchase of a drilling machine at a cost of $450,000.

Durable Inc. is considering the purchase of a drilling machine at a cost of $450,000. The new machine will be depreciated under the straight-line method over its estimated 5 year life and is expected to have a salvage value of $100,000 at the end of its life. This machine is expected to generate total revenues of $190,000 per year and incur total cash costs of $30,000 per year.

1. Determine Durable's net income for year 1.

2.    2. Determine Durable’s cash flows related

a. initial investment

b. annual operating (payment or annuity)

c. terminal

3. Calculate the following using Excel:

a. Payback for the proposed investment in the new asset. 

b. NPV (net present value).

c. IRR (internal rate of return)

Durable's income tax rate is expected to be 30 percent over the years affected by the investment. Durable’s hurdle rate for investments of this risk is 16 percent.

Required:

1.    1. Determine Durable's net income for year 1.