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A company is considering buying a new piece of equipment for four years which will improve its production efficiency. Buying the new equipment would cost
A company is considering buying a new piece of equipment for four years which will improve its production efficiency. Buying the new equipment would cost $385,000. It is expected that this purchase would result in $145,000 in pre-tax cost savings every year. This equipment would follow the MACRS five-year class depreciation method. Its salvage value at the end of the project's life is estimated at $45,000. The equipment purchase also requires an immediate investment in spare parts inventory in the amount $20,000. In addition, it will require additional $3,100 in inventory in each succeeding year of the project. The company's tax rate is 22 percent. The rate of return appropriate for this project is 9 percent. Refer to Table 10.7. Calculate the NPV of this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Should the company buy and install the equipment? Yes
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