In: Finance
Gamma Inc. is looking at a new product line with an installed
cost of $520,000. This cost will be depreciated straight-line to
$20,000 over the project’s five-year life. At the end of the
project life, the installed machine can be scrapped and sold for
$26,694. The machine will add $185,000 per year as sales and incur
an additional $55,000, but will save $18,524 from the existing
product line. The system requires an initial investment in net
working capital of $32,858. The NWC level will be maintained
throughout the project years and recoverable at the end of the
project. Assume the cost of capital is 6.5%, and Gamma Inc. belongs
the 35% tax bracket. Compute the NPV of the project and determine
whether you will invest in this project.