The new machine under consideration was a Delta A390, which offered an increase in capacity of 40 percent. This capacity was probably more than Magic’s needs, although the business would make some use of it. Also, the new machine allowed the possibility of obtaining some custom work for specialist woodcraft. The new machine cost $135,000, and the tax office allowed straight-line depreciation of 10 percent per annum. After five years, Magic would sell the Delta for $60,000. 

Given that the company selling the machine to Magic operated in a very competitive market, it was willing to negotiate on the terms of a maintenance plan. The seller offered fixed pricing starting at $2,000 in the first year, increasing by $1,000 per year (payable at year-end). To fund the purchase, 

Magic’s bank offered a 6 percent per annum loan to be repaid as interest-only payments for five years, with the full principal repayable at the end of the loan period. Given the technological advancements of the Delta over the Matrix, Davidson expected that he could achieve significant savings in both labor and electricity costs. For labor, in the first year, Davidson forecasted a 10 percent cost reduction (the existing rate was $30 per hour), based on a 35-hour week in a 50-week year. 

This labor-saving would then increase by a fixed $250 each year. For electricity, in the first year, the saving was expected to be 10 percent. Electricity costs averaged $5.625 per hour, 24 hours a day, seven days a week, in a 50-week year. 

This electricity saving would then increase by a fixed $75 each year. What is the NPV in the above case?