Chapman Machine Shop Is Considering a Four-Year Project to Improve

question 39

Multiple Choice

Chapman Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine for $390,000 is estimated to result in $135,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a pretax salvage value at the end of the project of $198,000. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. Ignore bonus depreciation. The press also requires an initial investment in inventory of $8,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The shop's tax rate is 21 percent and its discount rate is 16 percent. Should the firm buy and install the machine? Why or why not?

• A) Yes; The net present value is $47,048.86.
• B) No; The net present value is −$36,329.09.
• C) No; The net present value is $56,652.88.
• D) Yes; The net present value is $44,319.97.
• E) Yes; The net present value is $56,329.09.

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Definitions:

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