Solution-Should the new machine be purchased

Should the new machine be purchased

Reference no: EM131588539

Capital Budgeting Project Problem

ABC is evaluating a proposal to purchase a new machine that would cost $150,000 and have a salvage value of $20,000 in 5 years. It would provide annual operating cash savings of $25,000, as follows:

	Old Machine	New Machine
Salaries	$40,000	$20,000
Supplies	7,000	6,000
Maintenance	9,000	5,000
Total	$56,000	$31,000

If the new machine is purchased, the old machine will be sold for its current salvage value of $20,000. If the new machine is not purchased, the old machine will be disposed of in 5 years at a predicted salvage value of $5,000. The old machine's present book value is $60,000. If kept, in 1 year the old machine will require repairs predicted to cost $30,000.

Dale Davis's cost of capital is 8%.

Required: Compute the NPV. Should the new machine be purchased? Why or why not?

Reference no: EM131588539

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Should the new machine be purchased

Reference no: EM131588539

Reference no: EM131588539

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