Question: The Donald Company estimates that it can save 20 000 per
The Donald Company estimates that it can save $20,000 per year in annual operating cash costs for the next 3 years if it buys a special-purpose machine at a cost of $46,000. Residual value is expected to be $6,000, although no residual value is being provided for in using MACRS depreciation (3-year recovery period) for tax purposes. The company will sell the equipment at the end of the third year. The required rate of return is 16%. Assume the income tax rate is 30%. Using the NPV method, show whether the investment is desirable.
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