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Determine the npv of purchasing the can machine

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Reference no: EM132729047

You are a financial manager at a soft-drink company. Until today the company bought empty cans from an outside supplier. You are considering whether to purchase a machine and begin manufacturing cans in-house to achieve cost savings.

  • The cost of purchasing a can machine is $850,000 and the lifespan of the machine is 8 years. At the end of 8 years, the company expects to sell the machine for $120,000. Assume the machine is depreciated each year at $95,000 per year.
  • The cost savings generated by the can machine will be $160,000 per year.
  • Assume that the project requires an investment in Net Working Capital (NWC) of $20,000, and none of this is recovered at the end of the project.
  • The machine would be purchased at year 0, the NWC investment occurs at year 0, and all subsequent cash flows occur in years 1-8.
  • Assume the discount rate is 10% and the corporate tax rate is 21%.

Problem 1: Determine the NPV of purchasing the can machine. Should you accept or reject the project?

Reference no: EM132729047

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