Reference no: EM132858909
Question - Your task is to analyse a cost cutting project, where a new and more efficient machinery is installed. You have the following data:
Acquisition cost of a new machinery: $600,000
Additional working capital investment: $50,000 (recovered at the end of project)
Annual (before tax and depreciation) cash savings from the improved efficiency: $100,000
Lifespan of a new machine: 5 years
Corporate marginal tax rate: 25%
Depreciation: straight-line to zero book value.
Market value of the machinery in 5 ys: 60,000
Cost of capital: 12%
Find the incremental cash flows and compute the NPV of this cost cutting project and argue if the company should invest into this project?