Reference no: EM132529773
Point 1: Kappa Corp has the opportunity to replace a crucial piece of machinery used in its manufacturing process. The existing machine has a net book value of $35,000, with a remaining useful life of 5 years, and no assumed salvage value. The new machine will cost $275,000, with an estimated useful life of 5 years and a salvage value of $20,000. If Kappa agrees to purchase the new machine, the company selling the new machine will purchase the old machine for $30,000.
Point w: The existing machine is old and requires frequent repairs. Should Kappa purchase the new machine it anticipates annual savings in operating expenses of $40,000, and an increase in its annual net income of $24,000.
Point e: Kappa depreciates all machinery on a straight-line basis and requires that all investments must have a minimum required rate of return of 12%.
Question 1 : Should Kappa decide to purchase the new machine, what will be the Net Present Value? When considering the cost of the new machine, do not forget to consider the trade-in value received for the old machine and ignore taxes.
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