INSTRUCTIONS,The answers to the problems below have been provided.,,Explain why that answer(s) is correct.,Set up the problem using the correct formula from the attachment and solve it.,Show your work and explain how you solved the problem.,,Explain the answer for example “The calculated value of the stock is $31 per share and it is selling in the market at $35, therefore it is overpriced and we should not buy it.”,,,2.1. Stockholm Company is interested in buying a machine with uncertain life. The following table shows its expected life and resale value:,, Expected life Probability Resale value,4 years 10% $30,000,5 years 20% $20,000,6 years 70% $10,000, ,The machine will save the company $40,000 annually while it is running. Stockholm will depreciate it fully on a straight-line basis in 4 years. The tax rate of Stockholm is 32%, and the proper discount rate in this case is 11%. The cost of the machine is $120,000. Should Stockholm buy it?,,NPV = $24,380.14, yes ?,, ,,2.2. Gothenburg Company plans to buy a new machine for $50,000 that is expected to save the company $12,000 annually. Gothenburg will depreciate the machine on the ACRS with three-year life, the annual depreciation being 29%, 47%, and 24%. The company will use the equipment for 5 years, and then sell it for $5,000. The tax rate of the company is 40% and it will use 8% as the discount rate. Should Gothenburg buy the machine? ,,NPV = –$1,970.99, no ?,, ,,2.3. Malmö Incorporated wants to buy a new machine, which costs $24,000. Malmö will depreciate it fully over its useful life of 6 years, on a straight-line basis. Malmö has income tax rate of 35% and it uses a discount rate of 7%. Calculate the minimum pre-tax annual earnings generated by this machine to justify its purchase.,,$5592.46 ?,, ,,2.4. Uppsala Corporation wants to buy a machine and depreciate it over a five-year period with no salvage value. The machine will generate pre-tax revenue of $20,000 annually, the tax rate of Uppsala is 32%, and the proper discount rate is 11%. The machine has uncertain life: it may run for 5 years (probability 50%), 6 years (probability 30%), or 7 years (probability 20%). What is the maximum price that Uppsala should pay for the machine?,,$72,315 ?

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