Question:
Sundae Corporation is considering the replacement of an existing machine. The new machine would provide better sundaes, but it costs $120,000. The X-tender requires $20,000 in setup costs that are expensed immediately and $20,000 in additional working capital. The X-tender's useful life is 10 years, after which it can be sold for a salvage value of $40,000. Canton uses straight-line depreciation, and the machine will be depreciated to a book value of $0 on a six-year basis Canton has a tax rate of 45% and a 16% cost of capital on projects like this one. The X-tender is expected to increase revenues minus expenses by $35,000 per year. What is the NPV of buying the X-tender?