A. Cossentino Transportation Company (ACTC) is considering a project, which involves the purchase of a new machine to replace the existing one to increase the productivity of the company. The existing machine is being depreciated on a straight-line basis and its estimated salvage value 3 years from now is zero. The existing machine has a book value of $3,000 and can be sold for $4,000 in the market. The new machine has a 3-year life, its price is $12,000 with an additional installation cost of $2,000, and it can be sold for an expected $2,500 at the end of the third year. The new machine fall into 3-year class and will be depreciated using the MACRS method. The new machine will reduce operation costs (before taxes) by $7,000 per year and will require an increase in net operating working capital of $3,750. ACTC’s marginal tax rate is 40 percent. The company uses weight average cost of capital of 16 percent to evaluate this project. Please advise ACTC to take or to reject this project.
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