Press Publishing Company hires students from the local university to collate pages on various printing jobs. This collating is all done by hand, at a cost of $60,000 per year. A collating machine has just come onto the market that could be used in place of the student help. The machine would cost $140,000 and have a 10-year useful life. It would require an operator at an annual cost of $18,000 and have annual maintenance costs of $7,000. New roller pads would be needed on the machine in five years at a total cost of $20,000. The salvage value of the machine in 10 years would be $40,000. For tax purposes, the company computes depreciation deductions assuming zero salvage value and uses straight-line depreciation. The collating machine would be depreciated over 10 years. Management requires a 14% after-tax return on all equipment purchases. The company’s tax rate is 30%.
Required:
1. Determine the before-tax net annual cost savings that the new collating machine will provide.
2. Using the data from (1) above and other data from the exercise, compute the collating machine’s net present value. (Round all dollar amounts to the nearest whole dollar.) Would you recommend that the machine be purchased?