Company X is planning on purchasing a certain machine. The expected cost of this machine is $75,000,

Question:

Company X is planning on purchasing a certain machine. The expected cost of this machine is $75,000, and it is expected to have a useful life of 6 years with an estimated salvage value of $3,000. The machine is expected to produce cash savings of $23,000 per year in reduced labor costs and the cash operating costs to run this machine are estimated to be $5,000 per year. Assuming Company X is in the 34% tax bracket and has a minimum desired rate of return of 12% on this investment, determine the:

(a) Payback period, (b) ARR, and (c) NPV (Ignoring taxes)

(a) Payback period, (b) ARR, and (c) NPV (Assuming taxes).

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...