FOOD Ltd is a manufacturer of ready-made meals. In order to keep up with competition and decrease
Question:
FOOD Ltd is a manufacturer of ready-made meals. In order to keep up with competition and decrease its costs, FUN-FOOD is considering the purchase of a highly specialised machine to replace its existing production line. Further information pertaining to the installation of this machine are as follows:
- The machine will require an initial outlay of $374,000.
- The machine is expected to be used for 10 years, after which FUN-FOOD intends to sell it for $75,000.
As a result of the installation of the machine, FUN-FOOD expects a significant reduction in running costs along with an increase in production capacity. Overall, FUN-FOOD expects the net cash flows to be $80,000 per year, every year for the 10 years of useful life.
Required (show all workings):
a. Calculate the payback period (rounded to 2 decimal places) of this investment.
b. Using an interest rate of 10%, calculate the Net Present Value (NPV) of this investment. (Round your answers to two decimal places.)
Smith and Roberson Business Law
ISBN: 978-0538473637
15th Edition
Authors: Richard A. Mann, Barry S. Roberts