topic: capital investment decision

b. analysis includes net present value

Rector Company Rector Company is considering the purchase of a new machine. It's invoice price is $2,486,000, freight-charges are expected to be $9,400 and installation costs are expected to be $56,300. Salvage value of the new machine is expected to be $20,000 after its 12-year life. If the machine is purchased, some existing equipment will be disassembled and the parts will be sold, at an estimated price of $5,850 (this is expected to be received at the end of the first year). The following data has been collected about annual sales and expenses with the new machine. 1 With the new machine, 12,000 units of product are expected to be sold in the first year, and it is expected that this volume will increase by 5% each year thereafter. 2 Annual depreciation charges for the new machine will be $41,808. 3 Sales price for the product is initially to be set at $250 per unit. Rector plans on increasing this price by $10, every two years. 4 Materials are the only variable cost associated with the product. Materials are expected to cost $175 per unit initially, and the cost of these materials is expected to increase 3% each year. 5 Annual selling expenses for the new product are expected to begin at $320,000 for the first two years, then it is hoped that this cost will increase only by 2% annually. 6 Two full-time machine operators will be hired, their annual salary will begin at $60,000* each, with an additional $8,000 in benefits each. It is expected that this will increase 4% annually. 7 A major overhaul is expected at the end of every 4 years, at an expected cost of $11,000 per overhaul. There will not be an overhaul at the end of the 12th year. 8 This new machine is expected to run well, and as a result, maintenance costs which are outsourced are expected to be reduced annually by $3,000. 9 Because of the cost of the machine, management has set a required rate of return on investment of 18% Required: a) Name and give a brief definition of the analytical techniques you suggest be used to evaluate this project. b) Please perform the analysis. c) Should the new machine be purchased