Topsider Inc.is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of R3,000 and can be sold for R1,500.The old machine is being depreciated on a straight-line basis, and its estimated salvage value 3 years from now is zero.The new machine will reduce costs (before taxes) by R7,000 per year.The new machine has a 3-year life, it costs R14,000, and it can be sold for an expected R2,000 at the end of the third year.The new machine would be depreciated over its 3-year life using the MACRS method.Assuming a 40 percent tax rate and a required rate of return of 16 percent, find the new machine's NPV.

Question

Quizplus · Accepted Answer

The NPV calculation involves determining the after-tax savings from the new machine, accounting for the tax shield from depreciation, and subtracting the initial investment. The cash flows are then discounted at the required rate of return. The correct NPV is R1,658.