Determine the NPV of purchasing the can machine

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Question - 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%.

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

Reference no: EM132805387

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