Question: Geller Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in

Geller Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $540,000 is estimated to result in $225,000 in annual pretax cost savings. The press falls in the MACRS five-year class, and it will have a salvage value at the end of the project of $91,000. The press also requires an initial investment in spare parts inventory of $27,000, along with an additional $3,200 in inventory for each succeeding year of the project. The shops tax rate is 22 percent and the project's required return is 8 percent. Refer to Table 8.3.

Geller Machine Shop is considering a four-year project to improve its production

TABLE 8.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS) RECOVERY PERIOD CLASS 5 YEARS 7 YEARS 10 YEARS YEAR 3 YEARS 15 YEARS 1 2 3 4 5 6 3333 4445 .1481 .0741 .2000 -3200 .1920 .1152 .1152 .0576 .1429 2449 .1749 .1249 .0893 .0892 .0893 .0446 .1000 .1800 1440 .1152 .0922 .0737 .0655 .0655 .0656 .0655 .0328 7 8 9 .0500 .0950 .0855 .0770 .0693 .0623 .0590 .0590 .0591 .0590 .0591 .0590 .0591 .0590 ,0591 0295 20 YEARS .03750 .07219 .06677 .06177 .05713 .05285 .04888 .04522 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 10 11 12 13 14 15 16 17 18 19 20 21 .02231 Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because the IRS assumes purchase is made in midyear. TABLE 8.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS) RECOVERY PERIOD CLASS 5 YEARS 7 YEARS 10 YEARS YEAR 3 YEARS 15 YEARS 1 2 3 4 5 6 3333 4445 .1481 .0741 .2000 -3200 .1920 .1152 .1152 .0576 .1429 2449 .1749 .1249 .0893 .0892 .0893 .0446 .1000 .1800 1440 .1152 .0922 .0737 .0655 .0655 .0656 .0655 .0328 7 8 9 .0500 .0950 .0855 .0770 .0693 .0623 .0590 .0590 .0591 .0590 .0591 .0590 .0591 .0590 ,0591 0295 20 YEARS .03750 .07219 .06677 .06177 .05713 .05285 .04888 .04522 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 .04462 .04461 10 11 12 13 14 15 16 17 18 19 20 21 .02231 Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six years because the IRS assumes purchase is made in midyear

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