Boyertown Industrial Tools is considering a three-year project to improve its production efficiency.Buying a new machine press for $611,000 is estimated to result in $193,000 in annual pretax cost savings.The press falls in the MACRS five-year class,and it will have a salvage value at the end of the project of $162,000.The press also requires an initial investment in spare parts inventory of $19,000,along with an additional $2,000 in inventory for each succeeding year of the project.If the tax rate is 35 percent and the discount rate is 12 percent,should the company buy and install the machine press? Why or why not?
Table 9.7 Modified ACRS depreciation allowances

Question

Boyertown Industrial Tools is considering a three-year project to improve its production efficiency.Buying a new machine press for $611,000 is estimated to result in $193,000 in annual pretax cost savings.The press falls in the MACRS five-year class,and it will have a salvage value at the end of the project of $162,000.The press also requires an initial investment in spare parts inventory of $19,000,along with an additional $2,000 in inventory for each succeeding year of the project.If the tax rate is 35 percent and the discount rate is 12 percent,should the company buy and install the machine press? Why or why not?
 Table 9.7 Modified ACRS depreciation allowances

Quizplus · Accepted Answer

Depreciation _{Year 1} = $611,000 × 0.20 = $122,200Depreciation _{Year 2} = $611,000 × 0.32 = $195,520Depreciation _{Year 3} = $611,000 × 0.192 = $117,312OCF _{Year 1} = ($193,000)(1 - 0.35) + ($122,200)(0.35) = $168,220.00OCF _{Year 2} = ($193,000)(1 - 0.35) + ($195,520)(0.35) = $193,882.00OCF _{Year 3} = ($193,000)(1 - 0.35) + ($117,312)(0.35) = $166,509.20Book value _{Year 3} = $611,000 (1 - 0.20 - 0.32 - 0.192) = $175,968Aftertax salvage value = $162,000 + ($175,968 - $162,000)(0.35) = $166,888.80

Boyertown Industrial Tools Is Considering a Three-Year Project to Improve