A factory is considering the purchase of a new machine for one of its units. The machine costs $100,000. The machine will be depreciated on a straight line basis over its 10-year life to salvage value of zero. The machine is expected to save the company $50,000 annually, but in order to operate it, the factory will have to transfer an employee (with a salary of $40,000 a year) from one of its other units. A new employee (with a salary of $20,000 a year) will be required to replace the transferred employee. What is the NPV of the purchase of the new machine if the relevant discount rate is 8% and the corporate tax rate is 35%? New machine cost Depreciation period (years) Salvage value Annual depreciation 3 Annual savings e New employee cost O Annual depreciation 1 Net annual savings before tax 2 Tax (35%) 19 NPV 0 41 Decision 42 $100,000 3 Net operating savings after tax 4 Less capital investment 5 Add back depreciation 6 Free cash flows 7 8 Discount rate 10 0 0 8.00% PURCHASE A NEW MACHINE 1 2 3 4 5 6 7 8 9 + 10