A machine has a cost of $150,000. It will have a life of 3 years and be depreciated using the straight line method to a zero salvage value.

A machine has a cost of $150,000. It will have a life of 3 years and be depreciated using

the straight line method to a zero salvage value. The machine will increase sales revenue

by $200,000 per year and have operating costs of $150,000 per year. Use of the machine

will require an increase in working capital of $40,000 for the 3 years, beginning now. The

appropriate discount rate is 8% and the firm’s tax rate is 20%. Use NPV analysis to

explain why the firm should or should not purchase the new machine.