You have been asked by the management of your company to evaluate the proposed acquisition of a new machine. The machine’s basic price is $50,000, and it will cost another $10,000 to modify it for the special use by your company. The machine falls into the MACRS 3-year class property (the MACRS percentage allowances are 0.33, 0.45, 0.15, and 0.07 in years 1,2,3,and 4 respectively). The project will require an increase in net working capital of $2,000 and it will last for three years at the end of which the machine can be scrapped for $20,000. The purchase of this machine will have no effect on revenues, but the management expects to have labor cost savings of $20,000 per year. The marginal tax rate of your company is 40 percent.
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