A Corporation Is Considering Purchasing a Machine That Will Save

Essay

A corporation is considering purchasing a machine that will save $200,000 per year before taxes. The cost of
operating the machine, including maintenance, is $80,000 per year. The machine costing $150,000 will be
needed for 5 years, after which it will have a salvage value of $25,000. A straight-line depreciation with no
half-year convention applies (i.e., 20% each year). If the firm wants 15% rate of return after taxes, what is the net
present value of the cash flows generated from this machine? The firm's income tax rate is 40%.