Answered>Order 4530
For this question start fresh, do not carry over data from earlier questions. You are analyzing the prospects of installing cost saving machinery. You have the following information:
- The machine costs $92,000 and depreciation is calculated straight line (equal amounts) over 4 years
- Every year, the machine increases cash flows by an amount of $34,000 (Taxes, Opportunity Cost etc. have all been accounted for in this number and there is no Net Working Capital)
- After 3 years (when the machine has only been depreciated for 3 years and therefore the book value is not zero) the machine is sold for $30,000; therefore, this is a 3 year project
- The rate of discount is 9%
- The tax rate is 40%
Hint:Here you have to consider the income due to the salvage sale of the machinery and the taxes on this sale.
What is the NPV of installing the machinery?