Question

Massey Machine Shop is considering a four-year project to improve its production efficiency. Six months ago, it contracted with Dr. Wright to provide a thorough study of whether there was a need for this four-year efficiency project. The report was delivered one month ago and it’s cost was $30,000. The report suggests that the company should go ahead with the project subject to Massey’s financial analysis. Buying a new machine press for $450,000 is estimated to result in $120,000 in annual pretax cost savings. The press falls in the MACRS five-year class and it will have a salvage value at the end of the project of $85,000. At time 0, the press will also require an additional investment in inventory of $9,000. Meanwhile, the accounts payable will increase by $3000. Every other current accounts remain the same. If the company’s tax rate is 20% and the discount rate is 12%, should the company accept the project? (30 pts). The MACRS schedule is as follows:

Year	5-year Class
1	20%
2	32%
3	19.2%
4	11.52%
5	11.52%
6	5.76%

Answer 1

*Marketing study is a sunk cost thus ignored