Jetson Foundry is thinking about purchasing new sand-casting equipment that would reduce the time and cost of grinding customer orders to tolerance. The new equipment will cost $70,000 and it will take $15,000 to modify it for company needs. Transportation cost will be about $1,000. All these are depreciable. This kind of machine falls into the MACRS 7-year class but it is expected to run efficiently for ten years. At the end of ten years it is expected to have a salvage value is $2,000.The equipment will not affect revenues but it will reduce operating costs by $27,010. Most of the cost reduction comes from a reduction in the amount of abrasives needed to grind the finished product to specifications. So this means that inventory stocks will be reduced proportionally. The company’s policy is to carry 27 days (on a cost of goods sold basis) of inventories and this policy will not change. The company buys most of its abrasives from St. Gobain Abrasives in Worcester Mass. Because the company will be ordering fewer abrasive materials its accounts payable will decrease proportionally. Jetson has always paid its vendors in seven days. That is, the payables period is 22 days on a cost of goods sold basis.
The company’s cost of capital is 12% and, between state, local, and federal taxes, its marginal tax rate is 40%.
Evaluate this proposal using the capital budgeting criteria, NPV, IRR, MIRR, PI, Payback and Discounted Payback.
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