Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Excon Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is

image

The Excon Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $630,000, and the lathe is expected to have a useful life of five 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 $183,000. 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 30% income tax bracket. A 11% after-tax rate of return is desired. FV of $1 at FV of an ordinary annuity PV of $1 at PV of an ordinary annuity Year 11% at 11% 11% at 11% 123456 1.110 1.000 0.901. 0.901 1.232 2.110 0.812 1.713 1.368 3.342 0.731 2.444 1.518 4.710 0.659 3.102 1.685 6.228 0.593 3.696 1.870 7.913 0.535 4.231 Required: A. What is the net present value of the investment? B. Should the machine be acquired by the firm? C. Assume that the equipment will be sold at the end of its useful life for $103,000. If the depreciation amounts are not revised, calculate the dollar impact of this change on the total net present value.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

Answer To calculate the net present value NPV of the investment we need to follow these steps Step 1 ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Introduction to Management Accounting

Authors: Charles Horngren, Gary Sundem, Jeff Schatzberg, Dave Burgsta

16th edition

978-0133058819, 9780133059748, 133058816, 133058786, 013305974X , 978-0133058789

More Books

Students also viewed these Accounting questions

Question

How do committed fixed costs differ from discretionary fixed costs?

Answered: 1 week ago