Pluto Corp. is considering investing in an automated manufacturing line. Installation of the line will cost $2,440,000. This amount will be paid up front. It will be depreciated using straight-line depreciation and is expected to last four years and will be fully depreciated for tax purposes. The cost savings for each year are expected to be as follows:
Year 1 - $600,000
Year 2 - $800,000
Year 3 - $800,000
Year 4 - $900,000
At the end of year 4, management expects to discontinue the manufacturing line and sell the equipment for $400,000. The equipment will be fully depreciated when sold, so the entire sales price is a taxable gain. Pluto is subject to a 20% tax rate and using a discount rate of 8% when making investment decisions. Compute the net present value. Compute the internal rate of return. Would you recommend that management invest in the equipment?
Computer recommended.

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The Answer of Pluto Corp. is considering investing in an automated manufacturing line. Installation of the line will cost $2,440,000. This amount will be paid up front. It will be depreciated using straight-line depreciation and is expected to last four years and will be fully depreciated for tax purposes. The cost savings for each year are expected to be as follows:
Year 1 - $600,000
Year 2 - $800,000
Year 3 - $800,000
Year 4 - $900,000
At the end of year 4, management expects to discontinue the manufacturing line and sell the equipment for $400,000. The equipment will be fully depreciated when sold, so the entire sales price is a taxable gain. Pluto is subject to a 20% tax rate and using a discount rate of 8% when making investment decisions. Compute the net present value. Compute the internal rate of return. Would you recommend that management invest in the equipment?
Computer recommended.