Carlson Machine Shop is considering a four-year project to improve its production efficiency by purchasing a new machine press for $480,000 that will result in $160,000 in annual pre-tax cost savings.
The press will be depreciated using the 5 year straight-line depreciation schedule and they expect to be able to sell it for $70,000 at the end of four years.
The new press will require an initial inventory of $20,000 in spare parts for maintenance with an additional $3,000 in spare parts inventory required each year of the project.
Carlson has a 14% cost of capital and a 35% tax rate. Should they buy the machine?