Cost-Cutting Proposals.
Response to the following problem:
ADB Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $510 000 is estimated to result in $218 000 in annual pre-tax cost savings. ADB uses the diminishing value method for depreciation, and the rate for tax purposes is 30%. The machine press will have a salvage value at the end of the project of $64 000. The press also requires an initial investment in spare parts inventory of $21 000, along with an additional $3000 in inventory for each succeeding year of the project. If ADB's tax rate is 30% and its discount rate is 11%, should ADB buy and install the machine press?