Question

XYZ company is considering a new machine that costs $250,000 and would reduce pre-tax manufacturing costs by $90,000 annually. XYZ would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $23,000 at the end of its 5-year operating life. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The net operating Working capital would increase by $25,000 initially, but it would be recovered at the end of the project's 5-year life. XYZ’s marginal tax rate is 40-percent, and a 10 percent WACC is appropriate for the project. a) Calculate the projects NPV, IRR, and Payback. b) Assume management is unsure about the $90,000 cost-savings-this figure could deviate by as much as plus or minus 20%. What would have the NPV be under each of these situations?

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Answer 1

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