Massey Machine Shop is considering a three-year project to improve its production efficiency. Six months ago, it contracted with Dr. Wright to provide a thorough study of whether there would be a need for this three-year efficiency project. The report was delivered one month ago and its cost was $45,000. The report suggested that the company should go ahead with the project subject to Masseys more detailed financial analysis. Buying a new machine press for $600,000 will result in $200,000 in annual pretax cost savings. The machine falls in the MACRS five-year class and it will have a salvage value at the end of the project of $70,000. At time 0, the press will also require an additional investment in inventory of $10,000 and accounts payable will also increase by $3000, every other current accounts remain the same. Except for this one time increase of $10000 and $3000, the inventory and accounts payable levels will not change during the life of the project. If the companys tax rate is 20% and its costing of funding is 10%, should the company accept the project? (30 pts).

The 5-year MACRS schedule is as follows:

Year 5-year Class

1 20%

2 32%

3 19.2%

4 11.52%

5 11.52%

6 5.76%