2. Use NPV to analyze the decision to purchase the new machine.

A) Identify and label each inflows/outflow, don't just present a single inflow/outflow number for each year.

B) Assuming a discount rate of 10%

C) Do not include financing costs (loan interest and principal repayments) they are incorporated into the discount rate. Assume an initial investment (cash outflow) equal to the cost of the new machine.

The new machine costs $140,000 and the straight line depreciation of 10 percent per annum and after five years they would sell it for $60,000. The seller offered to offered a fixed amount for maintenance starting at $2,000 in the first year and increase it by $1,000 each year.

The labor cost will be saved 10 percent of the existing reduction of 30/hour based on a 35 hour week in a 50 week year and then it will then increase a fixed 250 each year.

The electricity cost will save the company 10 percent of the existing reduction of 5.625 per hour, 24 hours a day, seven days a week in a 50 week year. This electricity saving would then increase by a fixed 75 each year.