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| The Eat-Right Company has been disappointed by previous capital budgeting decisions using the payback method. A new requirement has been implemented that requires discounted cash flow analysis to be used to compute the net present value of proposed purchases over $300,000. The Food Processing Department of the Eat-Right Company is considering the acquisition of a new machine that will reduce labor costs by a pre-tax amount of $175,000 per year. Other information regarding the possible acquisition is as follows: The machine will cost $450,000. Installation charges will amount to an additional $25,000. The machine will have a useful life of three years, with no salvage value. Depreciation rates for tax purposes are 25%, 38%, and 37% for years one, two and three, respectively. Eat-Right's cost of capital, 12%, is considered the appropriate discount rate. The income tax rate is 40%. Cash flows are assumed to occur at the end of the calendar year, which coincides with Eat-Right's fiscal year-end. Which of the following best indicates the net present value of the proposed investment, and the appropriate acquisition decision? A. Approximately ($73,000); recommend not making the investment. B. Approximately $73,000; recommend making the investment. C. Approximately ($55,000); recommend not making the investment. D. Approximately $55,000; recommend making the investment. |