Photographic laboratories recover and recycle the silver used in photographic film. Stikine River Photo is considering purchase of improved equipment for their laboratory at Telegraph Creek. Here is the information they have:
• The equipment costs $100,000.
• It will cost $80,000 per year to run.
• It has an economic life of 10 years but can be depreciated over 5 years by the straight line method (see Section 6.2).
• It will recover an additional 5,000 ounces of silver per year.
• Silver is selling for $20 per ounce. Over the past 10 years, the price of silver has appreciated by 4.5 percent per year in real terms. Silver is traded in an active, competitive market.
• Stikine’s marginal tax rate is 35 percent. Assume U.S. tax law.
• Stikine’s company cost of capital is 8 percent in real terms.
What is the NPV of the new equipment? Make additional assumptions as necessary.
$1.99

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June 8, 2011

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