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Jamba Inc is evaluating purchasing a specialized machinery for $390,000 for a 4 year project. The...

Jamba Inc is evaluating purchasing a specialized machinery for $390,000 for a 4 year project. The machinery is expected to generate $135,000 in annual pretax cost savings. This machinery belongs to the MACRS five-year asset class, the MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years 1 to 6, respectively. The machinery can be sold for $198,000 at the end of the project. The project also requires an initial investment in inventory of $8,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will return to its original level when the project ends. The tax rate is 21 percent and firm’s discount rate is 16 percent. Should the firm buy and install the machine? Why or why not?

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Answer #1

The NPV of installation of new machinery is -$ 67562.06.

As NPV is negative installation must not be done by company.

Calculation is given in below attached image.

PLEASE GIVE UPVOTE

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