Calculate the net present value

Barton Company wants to replace a machine that has a zero book value and a market value of $12,800 in January 2011. The new machine Barton is considering has a cost of $50,000 and an estimated useful life of five years. The new machine will create cost savings of $14,500 per year. The machine will require an additional investment in working capital of $4,000, which would be recovered at the end of the machine’s life. The new machine would be depreciated uniformly over its useful life. Barton has a 25 percent tax rate and a 14 percent cost of capital.

Required:

A. Calculate the net present value of the new machine.

B. Should Barton Company buy the machine? Explain your answer.

If Scott Construction Company purchases a new steamroller, it will sell its old steamroller. The cost of the old steamroller is $215,000 and the accumulated depreciation on the old steamroller is $150,700. Scott’s tax rate is 30 percent. What is the book value of the steamroller? If the steamroller sold for $84,000 cash, what is the after-tax cash inflow from the sale of the steamroller?

If the steamroller sold for $54,000 cash, what is the after-tax cash inflow from the sale of the steamroller?

Solution: