Carlson Machine Shop is considering a four-year project to improve its production efficiency by purchasing a new machine press for $430,000. The machine press will result in $160,000 in annual pre-tax labor cost savings. The press will be depreciated using the 5 year MACRS depreciation schedule and they expect to be able to sell it for $70,000 at the end of four years.
The new press will require an initial inventory of $20,000 in spare parts for maintenance which will decrease by $4,000 a year over the four years. The $4,000 in unused spare parts inventory will be worthless at the end of the project but will still have a Net Book Value of $4,000.
Carlson has a 14% cost of capital and a 35% tax rate.
find out the incremental Free Cash Flow and NPV. Should they buy the machine?