A company is considering the acquisition of production equipment which will reduce both labor and material costs.
Question:
A company is considering the acquisition of production equipment which will reduce both labor and material costs. The cost is $100,000 and it will be depreciated on a straight-line basis to $20,000 over a 5-year period. It will be sold for $20,000 at the end of the five years. Operating costs will be reduced by $30,000 in the first year and the savings will increase by $5,000 per year for years 2, 3 and 4. Due to increased maintenance costs, savings in year 5 will be $10,000 less than the savings in year 4. The equipment will also reduce net working capital by $5,000. Net working capital will revert back to normal at the end of the project’s life. The firm’s tax rate is 35% and the firm requires a 16% return. What is the NPV and IRR?
(Assume no tax on salvage value)
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott