Question
The Excon Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $640,000,
The Excon Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $640,000, and the lathe is expected to have a useful life of 5 years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $184,000. The machine will be depreciated using MACRS for tax purposes. The 5-year MACRS depreciation percentages as computed by the IRS are: Year 1 = 20.00%; Year 2 = 32.00%; Year 3 = 19.20%; Year 4 = 11.52%; Year 5 = 11.52%; Year 6 = 5.76%.
Warren is currently in the 40% income tax bracket. A 9% after-tax rate of return is desired.
Required:
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A. What is the net present value of the investment?
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B. Should the machine be acquired by the firm?
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C. Assume that the equipment will be sold at the end of its useful life for $104,000. If the depreciation amounts are not revised, calculate the dollar impact of this change on the total net present value.
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