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Office Plus, Inc., is considering the purchase of a machine that would cost $370,000 now, and would last for 8 years. At the end of 8 years, the machine would have a salvage (disposal) value of $50,000.

The machine would reduce labor and other costs by $60,000 per year. All cost savings are assumed to occur at the end of each year.
Additional working capital of $5,000 would be needed immediately. All of this working capital would be recovered in cash at the end of the life of the machine.

The company requires a minimum pretax return of 12% on all investment projects.

The company has a 30% tax rate and it uses the straight-line depreciation method.

1. Compute the amount of the annual depreciation tax shield provided by the new equipment. [i.e., how much tax does this new investment save per year from recording depreciation expense?]

2. What is the amount of periodic annual after-tax net cash-flow from the use of this new machine?

3. Is the purchase of this machine acceptable based on its NPV?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M92770419

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