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Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine for $390,000 is estimated to result in $135,000
Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine for $390,000 is estimated to result in $135,000 in annual pretax cost savings. The machine falls in the MACRS five-year class, and it will have a pretax salvage value at the end of the project of $198,000. The MACRS rates are 2, 32, 192, 1152, 1152, and .0576 for Years 1 to 6, respectively. The project also requires an initial investment in inventory of $10,700. The inventory will return to its original level when the project ends. The shop's tax rate is 21 percent and its discount rate is 16 percent. Should the firm buy and install the machine? 1) What is the book value of the machine when the project ends? 2) What is the amount of OFC each year over the project's life? 3) What is the total cash flow from assets each year over the project's life? 4) What is the NPV of this project? Should this project be accepted according to the NPV criterion
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