A division of Cullumber Manufacturing is considering purchasing for $1,530,000 a machine that automates the process...

A division of Cullumber Manufacturing is considering purchasing for $1,530,000 a machine that automates the process of inserting electronic components onto computer motherboards. The annual cost of operating the machine will be $51,000, but it will save the company $377,000 in labor costs each year. The machine will have a useful life of 10 years, and its salvage value in 10 years is estimated to be $306,000. Straight-line depreciation will be used in calculating taxes for this project, and the marginal corporate tax rate is 32 percent. If the appropriate discount rate is 12 percent, what is the NPV of this project?

Solutions

Expert Solution

Solution:

The NPV of the project = $ 10,845.57

= $ 10,846 ( when rounded off to the nearest whole number )

Note :

Calculation of straight line depreciation per year :

= ( Purchase cost - Salvage value ) / Useful life

= ( $ 1,530,000 - $ 306,000 ) / 10

= $ 1,224,000 / 10 = $ 122,400

Thus straight line depreciation per year = $ 122,400

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 6 months ago

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