The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It i

Question

The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using a a modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade. Tasks: Answer the following questions: •What is the total investment in the new machine at time = 0 (T = 0)?

Explanation / Answer

The total investment in the new machine at time 0 = Machine cost $300,000 + Installation $12000 + Additional inventory required for parts and maintenance of the new machine $11000 = $323000

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