Question
Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $427,000 is estimated to result in
Caradoc Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $427,000 is estimated to result in $167,000 in annual pre-tax cost savings. The press falls into Class 8 for CCA purposes (CCA rate of 20% per year), and it will have a salvage value at the end of the project of $56,700. The press also requires an initial investment in spare parts inventory of $37,000, along with an additional $4,800 in inventory for each succeeding year of the project. If the shops tax rate is 35% and its discount rate is 9%. This is a 4-year project.
1. Calculate the NPV of this project.
2. Should the company buy and install the machine press?
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