Progress Incorporated is considering buying a new machine to increase production. It will cost $200,000 to purchase, $10,000 to modify and $5,000 to have it installed. It has a five-year class life. At the end of three years they plan to sell the machine for $95,000.
The new machine will allow Progress to increase revenues by $80,000 each year but expenses will increase by $5,000 each year. Inventory will decrease by $6,000 and wages payable will increase by $2,000 if the machine is purchased.
Straight-line depreciation will be used. Progress’s marginal tax rate is 34% and its cost of capital is 7%. Should PI purchase the new machine?