The Ewert Company is evaluating the proposed acquisition of a new milling machine. The machine’s base price is $108,000, and it will cost another $12,5000 to modify it for special use by the firm. The machine falls into the MACRS 3-year class, and it can be sold after three years for $65,000. (See attachment for MACRS recovery allowance percentages) The machine will require an increase in net working capital (inventory) of $5,500. The milling machine will have no effect on revenues, but it is expected to save the firm $44,000 per year in before-tax operating costs (excluding depreciation), mainly labor. Ewert’s marginal tax rate is 34 percent. If the project’s required rate of return is 12 percent, should the machine be purchased.
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