Question
jibin Mining is contemplating investing $253,500 in machinery that will generate annual savings of $74325 in operating costs. The useful life of the machinery is
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jibin Mining is contemplating investing $253,500 in machinery that will generate annual savings of $74325 in operating costs. The useful life of the machinery is 4 years and no salvage value is expected. The controller has suggested that the sum of years digits (SYD) depreciation be used but the Vice President of Finance thinks that straight line depreciation would be better because the tax rate is expected to increase substantially over the next few years. In the first year of the life of the investment the tax rate is expected to be 20%, in the second year 25% and 30 % thereafter. The firms cost of capital is 3.1%. Calculate the NPV of the investment using both the straight line and SYD depreciation methods. Discuss the results. (8 points)
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