Chapman Machine Shop is considering a 4-year project to improve its production

efficiency. Buying a new machine press for $576,000 is estimated to result in

$192,000 in annual pretax cost savings. The press falls in the MACRS 5-year class,

and it will have a salvage value at the end of the project of $84,000. The press also

requires an initial investment in spare parts inventory of $24,000, along with an

additional $3,600 in inventory for each succeeding year of the project. The inventory

will return to its original level when the project ends. The shop's tax rate is 35 percent

and its discount rate is 11 percent.

a.

Construct the cash flows for each year by modifying an income statement. Be able

to describe why you treated each cash flow as you did.

b.

Should the firm buy and install the machine press? Why or why not?