The Warren Machine Tool Company Is Considering the Addition of a Computerized

The Warren Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $180,000. The machine will be depreciated using MACRS for tax purposes. The 5-year MACRS depreciation percentages as computed by the IRS are: Year 1 = 20.00%; Year 2 = 32.00%; Year 3 = 19.20%; Year 4 = 11.52%; Year 5 = 11.52%; Year 6 = 5.76%.
Warren is currently in the 40% income tax bracket. A 10% after-tax rate of return is desired.
Required:
A. What is the net present value of the investment? Round to the nearest dollar.
B. Should the machine be acquired by the firm?
C. Assume that the equipment will be sold at the end of its useful life for $100,000. If the depreciation amounts are not revised, calculate the dollar impact of this change on the total net present value.

Correct Answer:

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B. No, the machine should not be acquir...

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