Pooh Industries is contemplating purchasing a new machine thatwill significantly improve the efficiency of their operations. Todate the company has spent $15,000 evaluating the machine to betterdetermine annual operating savings from using the machine.
The new machine would cost $800,000 and would be depreciatedover an expected life of 8 years to a $40,000 salvage value usingthe straight-line method. Pooh forecasts that the new machine wouldreduce operating expenses by $200,000 per year. The firm's marginaltax rate is 40% and its WACC (which is the appropriate rate to usefor evaluating this machine) is 15%. Pooh estimates that the newmachine could be sold at the end of its life (i.e., in 8 years) forsalvage value (i.e., $40,000).
The new machine would require additional net working capital of$90,000 which will be recovered at the end of the project. Thecompany will hire a new mechanic for maintenance of the machine aswell as for other duties related to this project. This new employeewill cost the company $75,000 per year (this amount is not includedin the operating cost change listed above).
What is this project’s NPV?
