NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts
Question:
NPV Birmingham Bolt, Inc., has been approached by one of its customers about producing 800,000 special-purpose parts for a new home product. The customer wants 100,000 parts per year for eight years. To provide these parts, Birmingham would need to acquire a $450,000 new production machine. The new machine would have no salvage value at the end of its eight-year life. The customer has offered to pay Birmingham $7.50 per unit for the parts. Birminghams managers have estimated that, in addition to the new machine, the company would incur the following costs to produce each part:
Direct labor | $2.00 |
Direct material | 2.50 |
Variable overhead | 2.00 |
Total | $6.50 |
In addition, annual fixed out-of-pocket costs related to the production of these parts would be $20,000. a. Compute the net present value of the machine investment, assuming that the company uses a discount rate of 9 percent to evaluate capital projects. Note: Round your final answer to the nearest whole dollar. $Answer
b. Based on the NPV computed in (a), is the machine a worthwhile investment? AnswerYesNo