O’Dell Enterprises manufactures lenses for telescopes. O’Dell is considering replacing a machine that grinds lenses and has received a proposal from a vendor for the new lens grinder. O’Dell has a 12 percent cost of capital and a 30 percent tax rate. The vendor will sell the company a new machine for $ 310,000 and buy the old machine, which has a $ 20,000 book value, for $ 30,000. The new machine is expected to generate $ 80,000 of pretax cash inflows, and the company calculates depreciation expense uniformly over its five- year life.
A. Calculate the net present value of the new machine.
B. Should O’Dell buy the new machine? Explain your answer.

  • CreatedMarch 25, 2015
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