Question

• You are a financial manager at a soft-drink company. Until today the company bought empty cans from an outside supplier. You are considering whether to purchase a machine and begin manufacturing cans in-house to achieve cost savings.
• The cost of purchasing a can machine is $850,000 and the lifespan of the machine is 8 years. At the end of 8 years, the company expects to sell the machine for $120,000. Assume the machine is depreciated each year at $95,000 per year.
• The cost savings generated by the can machine will be $160,000 per year.
• Assume that the project requires an investment in Net Working Capital (NWC) of $20,000, and none of this is recovered at the end of the project.
• The machine would be purchased at year 0, the NWC investment occurs at year 0, and all subsequent cash flows occur in years 1-8.
• Assume the discount rate is 10% and the corporate tax rate is 21%.
• Determine the NPV of purchasing the can machine. Should you accept or reject the project?

Please construct an Excel spreadsheet to solve this problem.

Answer 1