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A company buys a machine for $500,000 and depreciates it on a straight-line basis to...

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Finance

A company buys a machine for $500,000 and depreciates it on a straight-line basis to zero over a five-
year period for tax purposes. The investment would result in pre-tax cash cost savings of $200,000 per
year, for five years. At the end of 5 years, it is estimated that the machine can be sold for $75,000. The
gain on the sale of the machine would be taxed at a 40% tax rate. Based on the relevant cash flows,
determine the Net Present Value, Internal Rate of Return and the Payback Period of the investment. Is
the investment in the machine attractive in economic terms? You can assume that the appropriate
discount rate equals 8%.

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