solution

Idlewood Production Company would like to purchase a production machine for $450,000. The machine is expected to have a life of four years, and a salvage value of $50,000. Annual maintenance costs will total $12,500. Annual savings are predicted to be $175,000. The company’s required rate of return is 12 percent. (12marks)

?

Factors: Present Value of $1

Factors: Present Value of an Annuity

(r = 12%)

(r = 12%)

Year 0

1.0000

Year 1

0.8929

Year 1

0.8929

Year 2

0.7972

Year 2

1.6901

Year 3

0.7118

Year 3

2.4018

Year 4

0.6355

Year 4

3.0373

Required:

  1. Calculate the net present value of this investment (ignore income taxes). Round all calculations to the nearest dollar.

  1. Based on your answer in requirement (a), should Idlewood purchase the production machine?

 
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