Question

Bronson manufacturing is considering replacing an existing production line with a new line that has a greater output capacity and operates with less labor than the existing line. The new line would cost $1 million, have a five-year life, and be depreciated using straight line method. At the end of five years, the new line would be sold as scrap for $200,000 (in year 5 dollars). Because the new line is more automated, it would require fewer operators, resulting in a saving of $40,000 per year before tax & unadjusted for inflation (in today’s dollars). Additional sales with the new machine are expected to result in additional net cash inflows, before tax, of $60,000 per year (in today’s dollars). If Bronson invests in the new line, a one-time investment of $10,000 in additional working capital will be required. The tax rate is 30%, the opportunity cost of capital is 10% and the annual rate of inflation is 3%.

Required:

What is the net present value of the new production line?

Please show your calculations clearly.

Answer 1