Salia Manufacturing Inc (SMI) makes parts for the rail industry. Although the rail industry has been somewhat
Question:
Salia Manufacturing Inc (SMI) makes parts for the rail industry. Although the rail industry has been somewhat volatile over the years SMI is currently very busy and operating at full capacity. SMI has an opportunity to purchase a new piece of equipment (a B26G) that is more flexible than their current machine allowing them to produce various kinds of parts rather than just one. The B26G is also faster than the old machine with an increased production capacity of 30%. SMI has determined that they can swap out the old machine for the B26G very quickly so they would not lose any of their current jobs. However, there would be a cost of 25000 to dispose of the old machine and an estimated cost of terminating three operators of 60000. Reduced wage costs are estimated at 190000 per year as the number of people involved in manufacturing would drop from 9 to 6. Maintenance costs on the B26G are forecasted at 7000 per year for the final 6 years while the first year is covered by warranty. Maintenance costs on the current machine average 14000 per year. Utility costs are expected to decrease by 1200 per month.
Rachel Salia would have to borrow 125000, which, along with her current cash in the bank, would give her enough to purchase the B26G at a cost of 550000. The purchase payment is due in two payments, one up front and the second one of 200000 at the of year one. Annual interest payments on the loan are payable at the end of each year for 5 years at an annual loan interest rate of 9 %. There is a lump sum principal repayment at the end of year 5 for the whole loan. The estimated life on the B26G is 7 years with an estimated salvage value of 56000. Her current machine would also last 7 years but would require repairs at the end of the year estimated at 5500 in year 1, 8000 in year 3, 9000 in year 5, and 10500 in year 7; it will have no residual value. Salia requires a 14% rate of return on all investments.
What is the NPV if SMI decides to purchase the B26G?
| Company's required rate of return | 14% | ||||
| NPV Calculation | Annual Cash Flows | PV Factor | NPV | ||
Expert Answer:
SMI 0 1 2 3 4 5 6 7 Purchase payment of B26G 175000 200000 Annual Interest payment ... View the full answer
