Question
AAA Shop is considering a project to improve their production efficiency. They are trying to decide whether it is a good idea or not to
AAA Shop is considering a project to improve their production efficiency. They are trying to decide whether it is a good idea or not to buy an automated injection molding machine which will result in reducing pre-tax costs by $500,000 for each of the next three years. The molding machine will cost $1,500,000 and the IRS says it must be depreciated as 3-year MACRS equipment. AAA Shop believes they can sell the machine for $80,000 at the end of three years. The molding machine will require an initial investment to increase inventory by $20,000, and then an additional inventory increase of $3,000 for each succeeding year of the project. AAA's tax rate is 35% and uses a discount rate of 14%. AAA already spent $5000 investigating the feasibility of using the machine. Should AAA accept the project?
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