Jamba Inc is evaluating purchasing a specialized machinery for $390,000 for a 4 year project. The machinery is expected to generate $135,000 in annual pretax cost savings. This machinery belongs to the MACRS five-year asset class, the MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The machinery can be sold for $198,000 at the end of the project. The project also requires an initial investment in inventory of $8,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The tax rate is 21 percent and firm’s discount rate is 16 percent. Should the firm buy and install the machine? Why or why not?

Book value of asset after 4 years = 1 - ( 0.2 + 0.32 + 0.192 + 0.1152)

= 0.1728

    390000 * 0.1728 = 67,392

sale value = 198000

profit = sale value - book value

= 198,000 - 67392

= 130,608

tax on profit = 130,608 * 21% = 27427.68

After tax salvage value = 170,572.32

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Yes, firm should buy and install the machine because it has positve NPV. (formula for NPV can be seen in formula bar)

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