The Warren Machine Tool Company Is Considering the Addition of a Computerized

question 64

Essay

The Warren Machine Tool Company is considering the addition of a computerized lathe to its equipment inventory. The initial cost of the equipment is $600,000, and the lathe is expected to have a useful life of five years and no salvage value. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $180,000. The machine will be depreciated using MACRS for tax purposes. The 5-year MACRS depreciation percentages as computed by the IRS are: Year 1 = 20.00%; Year 2 = 32.00%; Year 3 = 19.20%; Year 4 = 11.52%; Year 5 = 11.52%; Year 6 = 5.76%.
Warren is currently in the 40% income tax bracket. A 10% after-tax rate of return is desired.
Required:
A. What is the net present value of the investment? Round to the nearest dollar.
B. Should the machine be acquired by the firm?
C. Assume that the equipment will be sold at the end of its useful life for $100,000. If the depreciation amounts are not revised, calculate the dollar impact of this change on the total net present value.

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Definitions:

Strategy Management

The process of defining the strategy or direction of an organization, and making decisions on allocating resources to pursue this strategy.

Strategy Identification

The process of recognizing and defining the course of action or policies designed to achieve a major or overall goal.

Strategy Outsourcing

The practice of delegating specific strategic tasks or operations to external organizations, focusing on core competencies.

Operating Objectives

Specific, short-term targets set by an organization to guide daily operations and ensure alignment with overall strategic goals.