Your company must determine whether it should purchase a machine costing $800,000. The machine has a useful life of 20 years and will be depreciated uniformly over its useful life. The new machine will be disposed of at the end of the project. The new machine will require a working capital investment of $80,000 that will be released at the end of the project. If the new machine is purchased, an old machine costing $200,000 with a book (carrying) value of $20,000 will be sold for $50,000. The new machine is expected to generate annual cash savings of $150,000. Your company's cost of capital is 12 percent and its tax rate is 20 percent. Should you purchase the new machine? Compute the net present value to support your answer. Show and label all computations.
Your company must determine whether it should purchase a machine costing $800,000. The machine has a useful life of 20 years and will be depreciated uniformly over its useful life. The new machine will be disposed of at the end of the project. The new machine will require a working capital investment of $80,000 that will be released at the end of the project. If the new machine is purchased, an old machine costing $200,000 with a book (carrying) value of $20,000 will be sold for $50,000. The new machine is expected to generate annual cash savings of $150,000. Your company's cost of capital is 12 percent and its tax rate is 20 percent. Should you purchase the new machine? Compute the net present value to support your answer. Show and label all computations.
