The New Year Tech Company is considering the addition of a computerized robot to its equipment. The initial cost of the equipment is $1,500,000, and the robot is expected to have a useful life of five years and a salvage value of $2500,000. The cost savings and increased capacity attributable to the machine are estimated to generate increases in the firm's annual cash inflows (before considering depreciation) of $500,000. The machine will be depreciated on a straight-line basis toward a zero salvage value even though there is an estimated market value after 5 years of $250,000. Investment in the robot will require $70,000 in working capital that will be released when the robot is sold in 5 years. 

Gean Tech is currently in the 20% income tax bracket. A marginal cost of capital of 14% is the minimum rate of return desired. In the space below, calculate the NPV of this proposed investment. Is the IRR higher or lower than 14%? Explain.

Answer rating: 100% (QA)

Computation of NPV NPV PV or Cash Inflow Cash Outflow Cash Out Flow Initial Cost of th... View the full answer