Question
A company is considering the purchase of a new piece of machinery for $500,000. The expected useful life of the machine is 8 years, and
A company is considering the purchase of a new piece of machinery for $500,000. The expected useful life of the machine is 8 years, and it has no expected salvage value. The company uses the double-declining balance (DDB) depreciation method.
The company estimates that the machine will generate annual cash flows of $150,000 for the first 5 years, $125,000 for the next 2 years, and $100,000 for the final year. The company's required rate of return is 10%.
Calculate the following:
1. Depreciation expense for each year using the double-declining balance method.
2. Net cash flows for each year.
3. Present value of the net cash flows for each year using the company's required rate of return.
4. Net present value (NPV) of the machine investment.
5. Should the company invest in the machine based on the NPV analysis? Explain your answer.
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