Cost of Capital

Carson Electronics is currently considering whether to ac-quire a new materials-handling machine for its manufacturing operations. The machine costs $760,000 and will be depreciated using straight-line depreciation toward a zero sal-vage value over the next five years. During the life of the machine, no new capital expen-ditures or investments in working capital will be required. The new materials-handling machine is expected to save Carson Electronics $250,000 per year before taxes of 30%. Carson’s CFO recently analyzed the firm’s opportunity cost of capital and estimated it to be 9%.

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