Stanton Inc.is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 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 $10,000 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 $40,000,what is the project's NPV?
A) $1,014
B) $2,292
C) $7,550
D) $817
E) $5,040

Question

Quizplus · Accepted Answer

The project's NPV can be calculated by considering the initial investment, the annual cash flows from operations (including tax savings from depreciation), and the terminal cash flow from the sale of the machine. The correct answer involves accurately accounting for the effects of depreciation, tax savings, and the terminal sale, and discounting these cash flows back to the present value at the project's required rate of return.