Question

Larson Manufacturing is considering purchasing a new injectionmolding machine for $250,000 to expand its production capacity. It will cost an additional $20,000 to do the site preparation. With the new injection-molding machine installed, Larson Manufacturing expects to increase its revenue by $90,000. The machine will be used for five years, with an expected salvage value of $75,000. At an interest rate of 12%, would the purchase of the injection-molding machine be justified?

Answer 1

Answer:

The project is viable as the net present value is positive. The project yields even more than the cost of capital

Explanation:

for the cost of the mahcine we must include all the cost for leave it ready to use.

So, we add the purchase and installation cost:

250,000 + 20,000 = 270,000 investment cost.

revenue of 90,000

time of 5 years

and salvage value of 75,000 at the end of useful life.

Present value of the salvage value: present value of a lump sum

$\frac{Salvage }{(1 + rate)^{time} } = PV$  

Salvage 75,000.00

time   5.00

rate  0.12

$\frac{75000}{(1 + 0.12)^{5} } = PV$  

PV   42,557.01

Present value of revenues: will be considered ordinary annuity

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$

C 90,000

time 5

rate 0.15

$90000 \times \frac{1-(1+0.15)^{-5} }{0.15} = PV$

PV $324,429.86

Net present value:

present value of inflow less present value of outflow:

324,429.86  +  42,557.01 -270,000 = 96.986,87‬