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)
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Factors: Present Value of $1 |
Factors: Present Value of an Annuity |
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(r = 12%) |
(r = 12%) |
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Year 0 |
1.0000 |
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Year 1 |
0.8929 |
Year 1 |
0.8929 |
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Year 2 |
0.7972 |
Year 2 |
1.6901 |
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Year 3 |
0.7118 |
Year 3 |
2.4018 |
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Year 4 |
0.6355 |
Year 4 |
3.0373 |
Required:
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Calculate the net present value of this investment (ignore income taxes). Round all calculations to the nearest dollar.
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Based on your answer in requirement (a), should Idlewood purchase the production machine?
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