Company to evaluate the proposed acquisition of new machine

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Reference no: EM131611256

You have been asked by the president of your company to evaluate the proposed acquisition of a new machine. The company spent $10,000 to survey the market whether the new machine would be effective in production. The machine’s basic price is $60,000, and it will cost another $20,000 to install. The employees are supposed to obtain a training session before operating the machine, costing $5,000. The machine can be sold after four years for $8,000. Use of the machine will require an increase in account receivables by $5,000, a decrease in inventory by $5,000, and an increase in account payables by $10,000. The machine is expected to increase the sales revenue by $6,000, but it is expected to save the firm $10,000 per year in operating costs, mainly labor. To acquire this new machine, the firm would have to borrow $20,000 at 10% interest from its local bank, resulting in interest payments of $2,000 per year. The machine falls into the 4-year straight-line method for depreciation. The firm’s marginal tax rate is 40%. Assume the required rate of return is 10%.

(a) What is the initial outlay associated with this project?

(b) What is the operating cash flow per year?

(d) Find the NPV. Should the machine be purchased? Explain.

Reference no: EM131611256

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