Present value of buying and operating new machine

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Reference no: EM132465561

Rolland Company is offering Texcom Corporation a new machine for a fixed price of $3,000,000, half payable today and half on the machine's delivery in one year. Estimated annual operating costs of new machine are $885,000 (current for today), but will increase at 1.25% inflation. One-time training is required for price of $50,000, payable one year after the machine's delivery. Training is tax-deductible. The new machine is expected to generate $175,000 in first year of operation, with revenues expected to grow with inflation rate. Revenues and operating costs from the machine will begin one year after its delivery. The machine will have 20 years of useful service (no resale value), and it will be depreciated for tax purposes according to the 7-year MACRS schedule. All revenues and costs and depreciation will begin one year after delivery. In addition, Texcom's current machine can continue working until the new machine arrives - it can be sold for book value of $100,000 when the new machine is delivered and spare pieces ($40,000) can be used to keep the old machine working. Cost of capital is 8.5% and tax rate is 35%.

Question: What is present value of buying and operating new machine?

Reference no: EM132465561

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