Question: Assume a manufacturing operation can increase production of their products by purchasing a new molding machine for $6 Million. The current machine has a salvage value of $200,000. The installation cost of the machine is estimated to be $400,000. Assume that the new machine will have a life of 8 years with no salvage. If the additional production yields an annual increase in before tax cash flow of $1.5 Million and the cost of capital is 10%, what is the present work of the investment? Assume depreciation MACRS - 7 year class life and 30% Tax Rate.
a) Perform break-even analysis on the machine purchase analyzing
1) Cost of capital
2) Tax Rate
3) Life of the machine (in annual steps)
b) How would the analysis change under straight line depreciation? MACRS 3 year class life?