The company is considering a project to improve their production efficiency. They are trying to decide whether
Question:
The company is considering a project to improve their production efficiency. They are trying to decide whether it is a good idea or not to buy an automated machine which will result in reducing pre-tax costs by $200,000 for each of the next five years. The machine will cost $475,000 and the IRS says it must be depreciated as 5-year MACRS equipment. The company believes they can sell the machine for $80,000 at the end of five years. The machine will require an initial investment to increase inventory by $30,000, and then an additional inventory increase of $5,000 for each succeeding year of the project. At the end of the project, inventory will return to its normal level. The companys tax rate is 35% and uses a discount rate of 14% APR with annual compounding.
Year
5-year MACRS
1
20.00%
2
32.00%
3
19.20%
4
11.52%
5
11.52%
6
5.76%
What is theafter-tax salvage valueof the equipment at the end of the project?
$61,576
$47,760
$25,716
$55,076
$94,284