Wednesday 25 June 2014
You have been asked by the firm's president to evaluate the proposed acquisition of a new machine.
You have been asked by the firm's president to evaluate the proposed
acquisition of a new machine. The machine's price is $50,000, and it
will cost $10,000 to transport and install. It will be depreciated by
the straight-line method over its 5-year useful life to a $10,000
salvage value. The machine will increase revenues by $10,000 per year,
and it will decrease operating costs by $20,000 per year. Also, the
machine will allow the firm to reduce inventories by $5,000. The new
machine (including delivery and installation costs) qualifies for a 10%
investment tax credit. If the firm's cost of capital is 12%, and its
marginal tax rate is 40%, what is the new machine's NPV?
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