Problem
Office Plus, Inc., is considering the purchase of a machine that would cost $370,000 now, and would last for 8 years. At the end of 8 years, the machine would have a salvage (disposal) value of $50,000.
The machine would reduce labor and other costs by $60,000 per year. All cost savings are assumed to occur at the end of each year.
Additional working capital of $5,000 would be needed immediately. All of this working capital would be recovered in cash at the end of the life of the machine.
The company requires a minimum pretax return of 12% on all investment projects.
The company has a 30% tax rate and it uses the straight-line depreciation method.
1. Compute the amount of the annual depreciation tax shield provided by the new equipment. [i.e., how much tax does this new investment save per year from recording depreciation expense?]
2. What is the amount of periodic annual after-tax net cash-flow from the use of this new machine?
3. Is the purchase of this machine acceptable based on its NPV?