A Special Purpose Machine Tool Set Would Cost $20,000

question 2

Essay

A special purpose machine tool set would cost $20,000. The entire capital expenditure ($20,000) is to be
borrowed with the stipulation that it be repaid by 2 equal end-of-year payments at 10%, compounded annually
( or $11,524 per year). The tool is expected to provide annual savings (material) of $35,000 for 2 years and is to
be depreciated by the MACRS 3-year recovery period. And this special machine tool will require annual O&M
costs in the amount of $5,000. The salvage value at the end of 2 years is expected to be $6,000. The project
requires an investment in working capital in the amount of $3,000, but the entire amount will be recovered at
the end of project life. Assuming a marginal tax rate of 40% and MARR of 15%, what is the net present worth of
this project?

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