Southwest Airlines is considering the purchase of a new baggage-handling machine that moves bags quicker and with less damage.
The cost is $160,000. The machine will be depreciated using the straight line method over its seven year life. If the machine is purchased, SWA will save $31,000 per year in damaged bags costs during the first five years.
Because of higher maintenance costs during the last two years the savings will only be $28,000. the firm is in a34% tax bracket.
Given that the firm's required rate of return is 13%, compute the NPV and IRR of the investment. Should they make the investment?