The Portsmouth Pottery Company manufactures a line of pottery that is primarily related to the commemorative and tourist industries. Sam Franklin, the production manager, is considering the possibility of purchasing a new kiln for the number 5 line. This line produces commemorative plaques. The kiln costs $700,000 and has a life of 5 years. PPC has a marginal tax rate of 35%. The tax depreciation schedule allows the following percentages of the cost of the kiln to be claimed during the kiln's life: year 1, 16%; year 2, 21%; year 3, 21%; year 4, 21%; year 5, 21%.

The new kiln would be used to replace an existing kiln, which has a useful life of 5 years. The existing kiln has been fully depreciated and has a salvage value of $25,000. The new kiln promises annual cost savings of $100,000 in the production of the existing plaques. In addition, the size and operating attributes of the new kiln will allow PPC to begin producing a new line of mugs that could be printed with the customers promotional message. The net income before taxes expected from this new line of business is $120,000 per year.

The salvage value of the new kiln would be $50,000 in 5 years. PPC is required to take any salvage value, in excess of the undepreciated historical cost of an asset, into income to be taxed at the normal rate. PPC's required after-tax return on this type of investment is 14%

1. Should the new kiln be purchased?

2. What is the rate of return on this investment?

3. What is the minimum level of total annual savings and new net income at which the new kiln is desirable?

4. What is the maximum purchase price of the new kiln at which this project is desirable?