Warmack Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $530,000 is estimated to result in $220,000 in annual pretax cost savings.
The press falls in the MACRS fiveyear class, and it will have a salvage value at the end of the project of $89,000.
The press also requires an initial investment in spare parts inventory of $26,000.The shop's tax rate is 35 percent and its discount rate is 9 percent.
Property Class
|
Year
|
Three-Year
|
Five-Year
|
Seven-Year
|
|
1
|
33.33%
|
20.00%
|
14.29%
|
|
2
|
44.45
|
32.00
|
24.49
|
|
3
|
14.81
|
19.20
|
17.49
|
|
4
|
7.41
|
11.52
|
12.49
|
|
5
|
|
11.52
|
8.93
|
|
6
|
|
5.76
|
8.92
|
|
7
|
|
|
8.93
|
|
8
|
|
|
4.46
|
Compute the NPV and IRR of the project. Should the firm buy the machine press?