Problem #1 Capital Budgeting Problem with Taxes A framing shop is...
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Accounting
Problem #1
Capital Budgeting Problem with Taxes
A framing shop is at capacity. Currently, the bottleneck is the framing press. They are considering purchasing a new press. This would allow them to increase production of frames. Facts are as follows:
Cost of new press
$100,000
Operating costs of new press (fixed)
$10,000 / year
Units that could be produced
4,000 / year
Selling Price per unit
$25
VC per unit
$15
The press qualifies for 7 year MACRS and the framing shops cost of capital is 12% and tax rate is 40%. The company plans to dispose the new press at the end of the fifth year for $10,000. Assume that new press will be purchased at the beginning of the year. All other cash flows occur at the end of the year.
Required:
Compute the NPV of this project, using a five-year analysis. Using the NPV criterion, is this project desirable?
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