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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. Problem a. Compute the Net Present Value of this project.
Problem b. Should Lupace make the investment required to produce these grading machines?
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