Stanton Inc. is considering the purchase of a new machine that will reduce manuf

Question

Stanton Inc. is considering the purchase of a new machine that will reduce manufacturing costs by $24500 annually in addition to increasing earnings before depreciation and taxes by $42900 annually. Stanton will use the MACRS method to depreciate the machine over 6 years and uses zero salvage value when calculating the depreciation. However, Stanton expects to sell the machine at the end of its 5-year operating life for $42500 before taxes. Stanton’s marginal tax rate is 35%, and it uses an 11% WACC to evaluate projects of this type. The applicable depreciation rates for the 6 years are 30%, 20%, 15%, 15%, 10%, and 10% respectively. If the machine’s cost is $245000, using the Excel function, what is the project’s NPV? Should it be accepted?

Explanation / Answer

The project should not be accepted as the NPV < 0.

Stanton 0 1 2 3 4 5 6 MACRS 30% 20% 15% 15% 10% 10% Investment -$    245,000 24500 Salvage $ 42,500 EBIT $      42,900 $      42,900 $           42,900 $      42,900 $ 42,900 Savings $      24,500 $      24,500 $           24,500 $      24,500 $ 24,500 Depreciation -$     73,500 -$     49,000 -$           36,750 -$     36,750 -$24,500 EBT -$       6,100 $      18,400 $           30,650 $      30,650 $ 42,900 Tax (35%) $        2,135 -$       6,440 -$           10,728 -$     10,728 -$15,015 Net Profits -$       3,965 $      11,960 $           19,923 $      19,923 $ 27,885 Cash Flows -$    245,000 $      69,535 $      60,960 $           56,673 $      56,673 $ 70,585 NPV -$ 12,220.22

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