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A new piece of equipment is expected to produce 330 widgets per year, which will sell for $1,000 each. Variable costs are 40% of sales and fixed costs are $50,000 per year. The investment has a capital expenditure of $400,000 and will require additional working capital of $50,000 which will be recovered in the last year of operations. The new investment will be depreciated prime cost over its 5 year life and is expected to have a salvage value of $60,000 at the end of its life. Company tax is 30% and is paid the year after income. The required rate of return on such an investment is 10%.
Year
0
1
2 3
4 5 6
Rev.
330,000
330,000 330,000 333,000 330,000
Exp. (Variable)
- 132,000 •
132,000 - 132,000 - 132,000 - 131000
Exp. (Fixed)
- 50,000 •
50,000 • 50.000 •
93,000 - 50000
03I1DA
148,000
148,000 148,000
148,000 148000 r -
Depr.
- 80,000 -
80,000 - 80,000 -
93.000 - 80,000
Gain/Loss on Sale
60,000
03IT
68,000
68,000 68,000
BLOW 128,000 -
Tax
- -
20,400 - 20,400 -
23,400 - 20,400 - 38,400
NOPAT
47,600 47,600
47,600 107,600 - 33,400
Add back Oepr. And Gain/Loss
80000 r
80000 r 80000 r
03,000 F 20,000 r -
CF from Ops.
127,600 127,600
127,600 127,600 - 33,400
Cap. Ex.
- 400,000
Salvage
Change in Working Capital
- 50,000
50000
CFt
- 450,000
17/,603 237,600 - 38,403
Ois c. Fact.
1.0000
0.9091
0.8264 0.7513
Q6833 0.6209 Q5645
PV of CFt
134,545
105,455
95.868
67,153
147,531 - 21,676
NPV
98,1375
Question a. Should the company purchase the new piece of equipment?NPV > 0. Therefore, purchase machine.
Question b. What is the approximate breakeven price on the widgets?
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