Question

A company has the opportunity of buying a new high-tech metal cutter which will save the company $14,000 per year in labor costs. This metal cutter costs $70,000 and is estimated to last 7 years. The cutter’s salvage value at the end of its useful life is $16,000. Straight-line method of depreciation will be used for this equipment.
If the company goes ahead with the new metal cutter, it can sell its old cutter for $5,000 today. The old cutter has an existing net book value of $8,000.
The new machine will require an initial working capital of $4,500, which will be recovered at the end of the 7 years. The company’s required rate of return is 10 percent and the tax rate is 30 percent.

Required:
Appraise the cutter project based on the net present value. Discuss the pitfalls of the project decision.