Kellaway Ltd is considering installing a computer controlled production line to significantly reduce its manufacturing costs. The

Question:

Kellaway Ltd is considering installing a computer controlled production line to significantly reduce its manufacturing costs. The annual after-tax cost savings are expected to be $460000, and the production line will cost $1 800000. Its useful life will be 5 years and its resale value at that time is estimated at $200000, net of tax effects. However, a major upgrade costing $80000 will be required at the end of the third year. The company’s cost of capital is 12%.

Required

Using the net present value method, determine whether the computer controlled system should be purchased. Justify your conclusion.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...

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