Stanton Inc. is considering the purchase of a new machine which will reduce manu

Question

Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. For simplicity, assume the machine will be depreciated on a straight-line basis of 5years. IThe company expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton's marginal tax rate is 40 percent, and it uses a 9 percent required rate of return to evaluate projects of this type. If the machine's cost is $40,000, what is the project's NPV?

Explanation / Answer

NPV=(6000+5000-6000)*.6*PVIFA(.09,5)+10000/1.09^5 -40000=-21830.7

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