Question
The Oil Company is considering a machine to reduce operation costs. The machine costs $3 billion. If bought, the machine will reduce COGS by $1B
The Oil Company is considering a machine to reduce operation costs. The machine costs $3 billion. If bought, the machine will reduce COGS by $1B a year for the next 3 years. The machine will also reduce the firm's required working capital by $375 million immediately. At the end of the life of the machine, this amount of net working capital will be required again. The Oil Company is expected to use the machine for only 3 years. Then it plans to sell it for $600 million. The machine can be fully depreciated for tax purposes over one year. The Oil Companys tax rate is 30%, its opportunity cost of capital is 8.5%. For a fee of $16 million (taxable expense for the Oil Company), you were hired to evaluate the viability of the purchase. While the work is being done now, your consulting fee will be paid in 2 years. Should the Oil Company buy the machine?
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