Reference no: EM132999192

Ventspils plc are considering buying a new machine in order to produce a new product. The machine will cost $2,800,000 and is expected to last for 3 years at which time it will have an estimated scrap value of $1,000,000 They expect to produce 100,000 units p.a. of the new product which will be sold for $20 p.u. in the first year. Production costs p.u. (at current prices) are as follows: Materials $8 Labour $7 Materials are expected to inflate at 8% p.a. and labour is expected to inflate at 5% p.a. Fixed overheads of the company currently amount to $1,000,000. The management accountant has decided that 20% of these should be absorbed into the new product The company expects to be able to increase the selling price of the product by 7% p.a. An additional $200,000 of working capital will be required at the start of the project. Capital allowances: 25% reducing balance Tax: 25%, 1 year in arrears. Cost of Capital: 10%

Required: Calculate the NPV of the project and advise as to whether or not it should be accepted.