Stanton Inc.is considering the purchase of a new machine which will reduce manufacturing costs by R5,000 annually and increase earnings before depreciation and taxes by R6,000 annually.Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for R10,000 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 R40,000, what is the project's NPV?

Question

Quizplus · Accepted Answer

The NPV calculation involves determining the present value of cash flows, including cost savings, tax effects, and the salvage value, then subtracting the initial investment. The annual after-tax savings are R5,000 + (R6,000 * (1 - 0.4)) = R8,600. The depreciation tax shield is calculated using MACRS rates. The salvage value after tax is R10,000 * (1 - 0.4) = R6,000. Discount these cash flows at 9% and subtract the initial cost of R40,000 to find the NPV.