# Arizona State University FIN FIN 40628 Hula Hoop Inc (HHI)is considering whether to purchase a new hula hoop-producing machine at a cost of \$1,200,000.The machine would produce 100,000…

Arizona State University FIN FIN 40628 Hula Hoop Inc (HHI)is considering whether to purchase a new hula hoop-producing machine at a cost of \$1,200,000.The machine would produce 100,000…

# Hula Hoop Inc (HHI) is considering whether to purchase a new hula

hoop-producing machine at a cost of \$1,200,000.  The machine would produce 100,000 hula hoops per year during its useful life of three years, and would be depreciated for tax purposes at a rate of \$400,000 per year. No salvage value is expected.  Currently, hula hoops can be sold for \$15 each.  The materials and labor required to produce a hula hoop currently cost \$9. The inflation rate is expected to be 2% per year, and the prices of both hula hoops and hula hoop inputs are expected to increase at the inflation rate. The tax rate is 34%.

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(a) Given the risk associated with producing for the hula hoop market, HHI management believes that a 5% real discount rate is appropriate.  What nominal discount rate should be used?

(b) Compute the net incremental nominal post-tax cash flows resulting from the purchase of the hula hoop machine on a year-by-year basis for years 1, 2, and 3 (i.e., t = 1, 2, and 3). You can assume that the initial investment of \$1,200,000 is made today (t = 0).

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