Question

Very Fancy Foods hires homeless workers from the local church and the area shelters to assist in the packaging of its gourmet frozen meals. This procession is all done by hand, at a cost of $60,000 per year (which would be eliminated with the machine.) A machine is available that could be used in place of the homeless workers. The machine would cost $140,000 and have a 10-year useful life. It would require an operator at an annual cost of $28,000. Annual maintenance costs will be $8,000 in years 1, 2, 3, 4 and then climb to $12,500 in years 5-10. The machine will be sold in 10 years at an expected price of $50,000. For tax purposes, the company computes depreciation deductions assuming zero salvage value and uses straight-line depreciation. The machine would be depreciated over 7 years years. Management requires a 9% after-tax return on all equipment purchases. The company’s tax rate is 20%. Use this information to answer the questions below.

Compute the machine’s net present value and internal rate of return.

Answer 1