Your task is to analyse a cost cutting project, where a new and more efficient machinery...

Your task is to analyse a cost cutting project, where a new and more efficient machinery is installed. You have the following data:

Cost of a new machinery: $250,000
Decrease in the working capital requirement: $25,000 (reversed at the end of project)
Annual (before tax and depreciation) cash savings from the improved efficiency: $60,000
Lifespan of a new machine: 5 years
Corporate marginal tax rate: 35%
Depreciation: straight-line to zero book value in 5 years.
Market value of the machinery in 5 years: 20,000
Cost of capital: 10%

Compute the NPV of this cost cutting project and argue if the company should accept this project or not?

Expert Solution

jeff jeffy answered 5 months ago

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