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Evaluate the project using discounted payback

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Pugsly Dynamite Company is considering the purchase a new packing machine. The firm spent $10,000 on an engineering analysis which indicated the old machine could be replaced. The existing packing machine cost $500,000 five years ago and is being depreciated using MACRS as a five-year asset, though it has a 10 year useful life. Pugsly's management executives estimate that they can sell the old machine today for $100,000. The new machine costs $600,000 as a MACRS five-year asset. Another $20,000 would be required for installation and set up of the new machine. The new machine is more efficient and would reduce packing expenses (damaged goods) by $120,000 per year for the next five years. The new machine expected to be worthless at the end of five years. The marginal tax rate is 30%. The cost of capital for the project is 11%.

Problem 1: Evaluate the project using discounted payback.

Reference no: EM132833959

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