Topsider Inc.is considering the purchase of a new leather-cutting machine to replace an existing machine that has a book value of $3,000 and can be sold for $1,500.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 $7,000 per year.The new machine has a 3-year life,it costs $14,000,and it can be sold for an expected $2,000 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.
A) −$2,822
B) $1,658
C) $4,560
D) $15,374
E) $9,821

Question

Quizplus · Accepted Answer

The NPV calculation involves considering the cost savings, depreciation benefits, and tax implications of the new machine. The MACRS depreciation allows for accelerated depreciation, which provides a larger tax shield in the early years. The cost savings of $7,000 per year, along with the tax benefits from depreciation and the salvage value of the new machine, contribute to the NPV. The calculation also includes the cost of the new machine and the after-tax proceeds from selling the old machine. Given the 40% tax rate and a 16% discount rate, the NPV of $1,658 suggests that the investment is expected to generate a return above the required rate of return, making it a financially viable option.