The Production Superintendent of the Holloway Company Has Proposed That

Essay

The production superintendent of the Holloway Company has proposed that the firm purchase a new $40,000 grinding machine for use in the plant. The machine is expected to generate $10,000 per year in pre-tax cash savings (labor and spoilage) for the next 10 years. At the end of 10 years the salvage value of the machine is estimated to be $5,000. Holloway uses straight-line depreciation and its marginal income tax rate is 40 percent. The firm's cost of capital is 12 percent.
(a)What are the net cash inflows after depreciation and taxes for the machine in years 1-10?
(b)What is the net present value for the machine?
(c)What is the internal rate of return for the machine?
(d)Would you recommend purchasing the machine? Why or why not?
NOTE: This problem requires the use of present value tables or a financial calculator.