Detailed Answer
Answer (D) is correct. Verla’s net present value of acquiring the new finishing machine can be calculated as follows: With the trade-in allowance, the net cost will be $950,000. This will be
depreciated over 5 years at $190,000 per year. The cash inflows consist of the $100,000 of annual cost savings, which reduces to $60,000 once taxes have been considered. Also, there will be an inflow from the depreciation shield ($190,000 × 40% tax rate, or an inflow of $76,000 per year). Combining the $60,000 after-tax savings from operations with the $76,000 of tax savings from depreciation produces a total of $136,000 of after-tax inflows annually. Discounting the five payments with the annuity factor of 3.791 (5 years at 10%) produces a present value of $515,576 ($136,000 × 3.791). Subtracting the present value of the inflows from the $950,000 initial outlay results in a net outflow of $434,424.