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Problem #1 Capital Budgeting Problem with Taxes A framing shop is at capacity. Currently, the bottleneck is the framing press. They are considering purchasing a

Problem #1

Capital Budgeting Problem with Taxes

A framing shop is at capacity. Currently, the bottleneck is the framing press. They are considering purchasing a new press. This would allow them to increase production of frames. Facts are as follows:

Cost of new press

$100,000

Operating costs of new press (fixed)

$10,000 / year

Units that could be produced

4,000 / year

Selling Price per unit

$25

VC per unit

$15

The press qualifies for 7 year MACRS and the framing shops cost of capital is 12% and tax rate is 40%. The company plans to dispose the new press at the end of the fifth year for $10,000. Assume that new press will be purchased at the beginning of the year. All other cash flows occur at the end of the year.

Required:

Compute the NPV of this project, using a five-year analysis. Using the NPV criterion, is this project desirable?

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