Reference no: EM132765184

Question - K&G Company currently sells 1.15 million units per year of a product to one customer at a price of $3.30 per unit. The customer requires that the product be exclusive and expects no increase in sales during the five-year contract. The company manufactures the product with a machine that it purchased seven years ago at a cost of $737,000. Currently, the machine has a book value of $434,000 but the market value is only $244,000. The machine is expected to last another five years, after which it will have no salvage value. Last year, the production variable costs per unit were as follows:

Direct materials $2.20

Direct labour 0.60

Variable overhead 0.20

Total variable cost per unit $3.00

The company president is considering replacing the old machine with a new one that would cost $812,000. The new machine is expected to last five years. At the end of that period, the salvage value will be $347,500. The president expects to save 4% of the company's total variable costs with the new machine.

Required - Assume that the company's desired rate of return is 11%. Calculate the net present value of the investment.