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? Complete the following parts:
a) What is the NICO for the project?
b) What is the depreciation for year 1?
c) What is the operating cash flow for year 1?
d) The firm has a (gain or loss) of ($9,000 or $12,500) when they sell the machine.
e) The firm should (accept or reject) the project because the NPV is (positive or negative).