Question

Fine Corp. is considering the purchase of a new bottling machine for $50,000. The machine is expected to increase production, resulting in $24,500 new sales per year. The cost to operate the machine is $5,500. The machine will be depreciated on a straight-line basis to $0 over 10 years. The project will require a net increase of $15,000 in NWC at the beginning of the project and will return half that amount at the project’s termination. In addition, Fine Corp. expects to sell the machine for $19,000 at the end of the project, seven years from now. If the appropriate discount rate is 10%, and the marginal tax rate is 40%, should the firm accept the project? Assume the same information as above, except the company is currently renting its machine space for $2,000 per year. Hence, renting the warehouse precludes the use of the new machine, i.e. expansion. Should the firm accept the project?

Answer 1

Based on the given data, pls find below workings, steps and answers:

Table 1: The NPV is positive $11852.85 and hence this project is feasible to invest

Table 2; After considering the loss of revenue from the rental income, the NPV is calculated and is as well positive at $6010.74

In both these cases, since the NPV is positive, the firm can accept the Project;

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;