Taeko Inc. is considering an investment in a new machine to increase production capacity. Taeko spent $35,000
Question:
Taeko Inc. is considering an investment in a new machine to increase production capacity. Taeko spent $35,000 on a feasibility study that recommended the purchase of this particular machine. The machine costs $560,000 and an additional $70,000 is required to install it. It has a useful life of five years, after which it will be sold for $65,000. The company's management has decided to depreciate the machine using the straight-line method, resulting in an annual depreciation charge of $113,000. An immediate investment in inventory of $60,000 is required and an additional investment of $25,000 in inventory is required at the end of year 3. Any investment in inventory will be fully recovered at the end of five years. The machine is expected to increase annual cash revenues from their original level of $250,000 to a level of $570,000. The machine is also expected to reduce the company's annual cash operating expenses by $30,000.
The cost of capital for Taeko Inc. is 10%.
The total amount of initial investment the company is required to make at the start of the project, is: $690,000
Operating cash flow at the end of Year 1 is: $350,000
CALCULATE NPV
Corporate Finance Core Principles and Applications
ISBN: 978-0077905200
3rd edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford