Making Capital Investment Decisions

Isaac, Inc. is thinking about purchasing a new machine. The new machine would cost
$150,000 with an additional $30,000 for delivery of the machine. The machine will have
a life of 5 years and will be depreciated using the straight line method. The machine can
be sold for $25,000 at the end of its life. This machine is expected to produce cost
savings of $35,000 the first two years and $50,000 per year after. It will take a $10,000
adjustment to net working capital if the machine is purchased. The company has a
required return of 7% and is in the 35% tax bracket. Calculate the NPV of the project and
determine if the company should purchase the machine.
Year
Cost Savings
Depreciation
EBIT
Taxes
Net Income

OCF
Year
OCF
Change in
NWC
Capital
Investment
Net CF