Davies Inc (2)Should the Company Purchase the Machine? Explain

question 8

Essay

Davies Inc.would like to purchase a new machine for $300,000.The machine will have a life of four years with no salvage value,and is expected to generate annual cash revenue of $180,000.Annual cash expenses,excluding depreciation,will total $20,000.The company uses the straight-line depreciation method,has a tax rate of 30 percent,and requires a 12 percent rate of return.
(1)Find the net present value of this investment using the following factors.
$$\begin{array}{l}\text { Factors: Present Value of } \$ 1\quad\text { Factors: Present Value of an Annuity }\\\begin{array} { c c c c } & ( r = 12 \% ) &\quad\quad\quad\quad\quad\quad\quad\quad\quad ( r = 12 \% )\\\hline \text { Year 0 } & 1.0000 & & \\\text { Year 1 } & 0.8929 & \text { Year 1 } & 0.8929 \\\text { Year 2 } & 0.7972 & \text { Year 2 } & 1.6901 \\\text { Year 3 } & 0.7118 & \text { Year 3 } & 2.4018 \\\text { Year 4 } & 0.6355 & \text { Year 4 } & 3.0373\end{array}\end{array}$$
(2)Should the company purchase the machine? Explain.

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