Reference no: EM133049586

Question - Lupace Corporation is planning to produce a grading machine for use in finance courses around the globe. Market research data indicate that the company will be able to sell 10,000 grading machines per year at $1,500 each for the next 6 years, after which the new model will have to be developed. The product will be produced in a section of an existing factory that is currently not in use. To produce grading machines, Lupace must invest in acquiring specialized equipment that costs $1,000,000. This equipment has an expected life of ten years. After six years, the equipment could be sold for $30,000. Lupace will depreciate the equipment over ten years using the straight-line method. In addition to the cost of the equipment, the company will incur annual incremental manufacturing costs of $370,000 for component parts, $500,000 for direct labor, and $200,000 of miscellaneous costs. Lupace has a tax rate of 20 percent, and the company's required rate of return is 15 percent.

Required -

a. Compute the Net Present Value of this project.

b. Should Lupace make the investment required to produce these grading machines?