Norma Company is considering acquiring a machine from Oroviso Corporation for $360,000. The machine will automate a process currently performed manually. The introduction of the machine will allow Norma to avoid paying annual salaries and benefits over the life of the project, during which salaries and benefits are not expected to grow. No other revenues or expenses will be affected except for those related to the miniature pyramids (described below).
The machine will occupy floor space currently being used to make miniature pyramids that contribute $80,000 per year to Norma’s before-tax cash flow. If Norma acquires the machine from Oroviso it would have to discontinue making the pyramids.
The project is expected to last for six years. However, the machine must be depreciated by the straightline method over an eight-year life to a zero salvage value for income tax purposes. At the end of the project, Norma expects to be able to sell the machine for $38,500, net of disposal costs. This amount will fall to $16,500 by year eight.
Required: Assuming that the appropriate after-tax MARR is 14%, what is the minimum amount of before-tax savings from salaries and benefits that Norma needs in order to justify acquiring the machine from Oroviso The relevant income tax rate is 35%.