Question

In: Finance

Fine Corp. is considering the purchase of a new bottling machine for $50,000. The machine is...

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?

Solutions

Expert Solution

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;


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