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Messy Machine Shop is considering a four-year project to improve its production efficiency. Six months ago, it contracted with Dr. Wright to provide a thorough
Messy Machine Shop is considering a four-year project to improve its production efficiency. Six months ago, it contracted with Dr. Wright to provide a thorough study of whether there was a need for this four-year efficiency project. The report was delivered one month ago and it's cost was $25,000. The report suggests that the company should go ahead with the project subject to Massey's financial analysis. Buying a new machine press for $450,000 is estimated to result in $120,000 in annual pretax cost savings. The press falls in the MACRS five-year class and it will have a salvage value at the end of the project of $85,000. At time 0, the press will also require an additional investment in inventory of $9,000, every other current accounts remain the same. If the company's tax rate is 20% and the discount rate is 12%, what are the IRR and NPV of this project? Should the company accept the project? Explain carefully your rationale. (30 pts). The MACRS schedule is as follows: Year 2 4 5-year Class 20% 32% 19.2% 11.52% 11.52% 5.76%
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