a. PepsiCo is considering purchasing a new machine for $200,000, which will cost $10,000 to modify for special use by the firm. The company spent $50,000 dollars traveling to different distributors analyzing various pieces of equipment. The selected equipment falls into the MACRS 3-year class (33%, 45%, 15%, 7%), and could be sold after 4 years for $40,000. Use of the equipment will require an increase of $15,000 in net working capital, which the company expects to fully recover at the end of the project’s life. The equipment is expected to increase before-tax revenues by $200,000 per year, but annual costs will amount to $50,000. The firm's marginal federal-plus-state tax rate is 40% and its WACC is 10%. Based on NPV, should PepsiCo purchase the new machine?
b. Coca-Cola Company is considering purchasing a new machine for one of its bottling facilities. The current machine has four years, $4,000 per year, of depreciation left and a market value of $50,000. The replacement machine is more efficient and is estimated to generate before-tax revenues of $50,000 per year, but with annual costs totaling $10,000. The new machine will cost $120,000 delivered and installed. The machine will be depreciated for five years to a zero salvage value using straight line depreciation. The firm’s WACC is 10%, and its marginal tax rate is 40%. Based on NPV, should the company replace its old machine?