A company is considering the purchase of a new machine that will enable it to increase its expected sales. The machine will have a direct cost of $100,000. In addition, the machine must be installed and tested. The costs of installation and testing will amount to $40,000. The machine will be depreciated using 5-years MACRS.

The equipment will be operated for 6 years. The sales in the first year of operation are expected to be $200,000. Then, sales will grow by 5% per year until the sixth year. The annual operating costs (before depreciation) will consist of fixed operating costs of $25,000 plus variable operating costs equal to 75% of sales.

To support the increased level of production, the inventory of raw materials will have to be increased from $40,000 to $50,000 when the machine is purchased. The additional inventory will be carried until the machine is scrapped following the 6 years of operation.

At the end of the 6-year operating life of the project, it is assumed that the equipment will be sold for $60,000. The tax rate is 40%.

If the new machine is purchased, it will be financed by borrowing the required funds at an interest rate of 8%. The company