ODell Enterprises manufactures lenses for telescopes ODell i

O\'Dell Enterprises manufactures lenses for telescopes. O\'Dell is considering replacing a machine that grinds lenses and has received a proposal from a vendor for the new lens grinder. O\'Dell has a 12 percent cost of capital and a 30 percent tax rate. The vendor will sell the company a new machine for $310,000 and buy the old machine, which has a $20,000 book value, for $30,000. The new machine is expected to generate $80,000 of pretax cash inflows, and the company calculates depreciation expense uni- formly over its five-year life P12.3

Solution

Working:

As the net present value is negative, the proposal should not be accepted.

Years	0	1-5
Initial investment	-280000
Annual after tax cash flows		74600
Net cash flows	-280000	74600
Cost of capital	12%	12%
PV factor	1	3.6048
Present Value	-280000	268918.1
Net Present Value	-11082