Question
Your company is considering a machine (new project) that will cost $2,000 at Time 0 and which can be sold after 5 years for $100.
Your company is considering a machine (new project) that will cost $2,000 at Time 0 and which can be sold after 5 years for $100. To operate the machine, $200 must be invested at Time 0 in inventories; these funds will be recovered when the machine is retired at the end of Year 5. The machine will produce sales revenues of $1000/year for 5 years; variable operating costs (excluding depreciation) will be 50 percent of sales. Operating cash inflows will begin 1 year from today (at Time 1). The machine will have MACRS depreciation expenses of 20%, 32%, 19%, 12%, 12%, and 5% in Years 1-6, respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to get a tax refund from this project if the project's income is negative, and a 11 percent cost of capital. Inflation is zero. Based on your NPV and IRR calculations, should your company buy the machine and why?
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