Dorothy & George Company is planning to acquire a new machine at a total cost of $30,600.

Question:

Dorothy & George Company is planning to acquire a new machine at a total cost of $30,600. The machine’s estimated life is six years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $8,000. The company’s after-tax cost of capital is 8 percent and its income tax rate is 40 percent. The company uses straight-line depreciation (non-MACRS-based).

Cost of new machine								$ 30,600
Machine's estimated useful life								6
Estimated salvage value								$ 600
Annual cost savings								$ 8,000
Cost of capital								8%
Income tax rate								40%
Net after-tax annual cash inflow								$ 5,000
PV factor, 8%, 6 years =								0.630
Annuity factor, 8%, 6 years =								4.623

Required

1. What is this investment’s net after-tax annual cash inflow?

2. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the payback period?

3. Assume that the net after-tax annual cash inflow of this investment is $5,000; what is the net present value (NPV) of this investment?

4. What are the minimum net after-tax annual cost savings that make the proposed investment acceptable (i.e., the dollar cost savings that would yield a NPV of $0)?

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