A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $110,000 and it will be depreciated on a straight-line basis down to $0. The useful life of the equipment is five years, and it will have a $20,000 market value at the end of five years. Operating costs will be reduced by $30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by $5,000 throughout the life of the project. The firm's tax rate is 35 percent, and the required return is 16 percent. What is the NPV of this project?
A company is considering the acquisition of production equipment which will reduce both labor and materials costs. The cost is $110,000 and it will be depreciated on a straight-line basis down to $0. The useful life of the equipment is five years, and it will have a $20,000 market value at the end of five years. Operating costs will be reduced by $30,000 in the first year and the savings will increase by $5,000 per year in years 2, 3, and 4. Due to increased maintenance costs, savings in year five will be $10,000 less than the year four savings. The equipment will also reduce net working capital by $5,000 throughout the life of the project. The firm's tax rate is 35 percent, and the required return is 16 percent. What is the NPV of this project?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
Problem 2P
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Transcribed Image Text:A company is considering the acquisition
of production equipment which will
reduce both labor and materials costs. The
cost is $110,000 and it will be depreciated
on a straight-line basis down to $0. The
useful life of the equipment is five years,
and it will have a $20,000 market value at
the end of five years. Operating costs will
be reduced by $30,000 in the first year
and the savings will increase by $5,000
per year in years 2, 3, and 4. Due to
increased maintenance costs, savings in
year five will be $10,000 less than the
year four savings. The equipment will also
reduce net working capital by $5,000
throughout the life of the project. The
firm's tax rate is 35 percent, and the
required return is 16 percent. What is the
NPV of this project?
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