Eco-Bags Co. manufactures recyclable plastic bags. Given anticipated increase in demand for recyclable plastic bags, its management considers purchasing a new plastic waste processing machine.
The proposed machine costs $750,000 and it will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero salvage value (MACRS depreciation rates are: Year 1: 33.33%, Year 2: 44.45%, Year 3: 14.81% and Year 4: 7.41%). However, the plant will be able to sell the machine in the after-market for 25% of its original costs at the end of year 5. The firm estimates that the installation of the machine will bring annual costs savings of $40,000 per year from reduced waste disposal costs, $50,000 from reduced labor costs, and $110,000 per year from the sales of reclaimed waste net of selling expenses. The company requires a 10% rate of return from its investment and faces a 35% tax rate (the company is profitable).
a. Calculate the NPV and IRR for the project. Should the company invest in this machine?
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