Nashville Inc is contemplating the purchase of a machine capable of performing someoperations that are now performed manually. The machine will cost $90,000 and last for five years.At the end of the five year period, the machine will have a zero scrap value.Use of the machine will reduce labor costs by $25,000 per year (cash basis).The company's required rate of return (discount rate) is 12% on all investments projects.The company's tax rate is 20%. The company considers taxes when evaluating capital projects.What is the amount of annual cash flows the company would use in a NPV calculation to evaluate the project?
Nashville Inc is contemplating the purchase of a machine capable of performing some
operations that are now performed manually. The machine will cost $90,000 and last for five years.
At the end of the five year period, the machine will have a zero scrap value.
Use of the machine will reduce labor costs by $25,000 per year (cash basis).
The company's required
The company's tax rate is 20%. The company considers taxes when evaluating capital projects.
What is the amount of annual cash flows the company would use in a
Annual cash flows from a project need not be in cash form, as it is said 'a dollar saved is a dollar earned' savings in costs due to an investment in a project is also considered as a inflow from such project to the entity.
In this case, the company is saving $25,000 labor cost due to use of machine which is an inflow to the company
Step by step
Solved in 2 steps
