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

As the NPV is negative so the Machine should not be accepted / purchased.

Yr expense / benefits Dep. Benefits after Dep (A) After tax benefits (A*0.65) Cash flow Discount rate Cash flow 0 -245000 -245000 1 67400 73500 -6100 -3965 69535 0.901 62651 2 67400 49000 18400 11960 60960 0.812 49500 3 67400 36750 30650 19923 56673 0.731 41428 4 67400 36750 30650 19923 56673 0.659 37348 5 67400 24500 42900 27885 52385 0.593 31064 salvage 42500 27625 0.593 16382 NPV -$6627

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.