The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It i

Question

The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful life. The machine will cost $300,000 plus another $12,000 for installation. The new asset will be depreciated using a a modified accelerated cost recovery system (MACRS) 5-year class life. It will be sold for $25,000 at the end of 5 years. Additional inventory of $11,000 will be required for parts and maintenance of the new machine. The company evaluates all projects at this risk level using an 11.99% required rate of return. The tax rate is expected to be 35% for the next decade. •According to the decision rules for the NPV and those for the IRR, is the project acceptable?•Is there a conflict between the two decision methods? If so, what would you use to make a recommendation?•What are the pros and cons of the NPV and the IRR? Explain your answers.

Explanation / Answer

Machine cost =$300000

Insatllation cost=$12000, Additional cost=$11000, Required rate of return=11.99%

NPV =$57398.12

IRR=18.94%

Th eproject is acceptable and i recommend to go with it.

NPV is positive and irr rate is greater than required rate.

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