XYZ Corporation manufactures and sells widgets. The company has an opportunity to invest in a new manufacturing
Question:
XYZ Corporation manufactures and sells widgets. The company has an opportunity to invest in a new manufacturing machine that will allow them to increase their production efficiency and capacity. The machine will cost $300,000 and have a useful life of 10 years. The estimated salvage value at the end of 10 years is $30,000. The machine is expected to generate an additional annual cash inflow of $75,000 for the first five years, and $100,000 for the remaining five years. The company's required rate of return is 12%. Assume straight-line depreciation.
a) Calculate the payback period for the investment.
b) Calculate the net present value (NPV) for the investment.
c) Calculate the internal rate of return (IRR) for the investment.
d) Based on your calculations, should XYZ Corporation invest in the new manufacturing machine? Explain your answer.
Note: Please show all your calculations and provide a detailed explanation for each question.
Fundamentals of Financial Management
ISBN: 978-0324597707
12th edition
Authors: Eugene F. Brigham, Joel F. Houston