La Forme Idéal SA is a company that makes clothing

Subject:FinancePrice:2.86 Bought12

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La Forme Idéal SA is a company that makes clothing. The company is considering investing in purchasing a new machine that could be used to produce petite sizes as well. The cost of the new machine is £40,000 and it will generate revenues of £90,000 per year for five years. The operating expenses needed to generate these revenues will be in total £57,000 per year. The machine is expected to sell for £1,000 at the end of its five-year life and will be depreciated on a straight-line basis over five years to zero. The corporate tax rate is 34% and the opportunity cost of capital is 12%.

1. (i) Should the company purchase the new machine? Explain why or why not.
2. (ii) Briefly explain why the announcement of new investment is usually accompanied by a change in the firm’s share price.