Mars Inc Is Considering the Purchase of a New Machine Which

question 7

Multiple Choice

Mars Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually. Mars will use the MACRS accelerated method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000. The firm expects to be able to reduce net operating working capital by $15,000 when the machine is installed, but required working capital will return to the original level when the machine is sold after 5 years. Mars's marginal tax rate is 40 percent, and it uses a 12 percent cost of capital to evaluate projects of this nature. If the machine costs $60,000, what is the project's NPV?

• A) -$15,394
• B) -$14,093
• C) -$58,512
• D) -$21,493
• E) -$46,901

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Definitions:

Direct Labor-Hours

The total hours worked by employees directly involved in the manufacturing process or delivery of services.

Machine-Hours

The total number of hours that machinery is in operation during a specific period.

Casting Department

A functional area in a manufacturing facility where materials are poured into molds to form parts or products.

Finishing Department

The final stage in the manufacturing process where products are completed, assembled, painted, or treated before sale.