Question
he RHPS Corporation specializes in the custom design, cutting, and polishing of stone raw materials to make ornate building facings. These stone facings are commonly
he RHPS Corporation specializes in the custom design, cutting, and
polishing of stone raw materials to make ornate building facings. These
stone facings are commonly used in the restoration of older mansions and
estates. Janet Weiss and Brad Majors, managers of the firm, are evaluating the
addition of a new stone-cutting machine to their plant. The machine's cost to
RHPS is $150,000. Installation and calibration costs will be $7,500. They do
not anticipate an increase in sales, but the reduction in the operating expenses
is estimated to be $50,000 annually. The machine falls under the MACRS
three-year depreciation schedule. The machine is expected to be obsolete
after five years. At the end of five years, Weiss and Majors expect the cash
received (less applicable capital gains taxes) from the sale of the obsolete
machine to offset the shutdown and dismantling costs. The RHPS cost of
capital is 10 percent, and the marginal tax rate is 35 percent.
a.
Calculate the net present value for the addition of this new machine.
Round all calculations to the nearest whole dollar.
b.
Would you recommend that Weiss and Majors go forward with this project?
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