Reference no: EM132552911

ABC Co. is planning to buy a machine that would allow it to automate certain procedures currently done manually. The machine would cost $100,000 and has an estimated life of 8 years. At the end of the 4th year, several key parts of the machine would have to be replaced at an installed cost of $8,000. The estimated salvage value at the end of the machine's life is $6,500.

The machine would increase production by 7,000 units per year and each unit has a contribution margin of $1.20. The annual operating costs of the new machine would be $6,000. Annual direct labor costs of $20,000 would be eliminated through using the machine. The company's cost of capital is 15% which is an appropriate discount rate.

Required:

Question a) Using an incremental approach, compute the net present value using the machine in its operations over the next 8 years (compared to not using the machine). Show your work for full marks.

Question b) Based on your result for Part A, should the company invest in the machine? Show your work for full marks.

Question c) Another company used the net present value method to decide whether to purchase an investment. The net present value was zero. Should the company purchase the investment? Explain well for full marks.